Arm’s SWOT analysis: chip giant’s stock faces growth hurdles amid AI boom

Arm Holdings plc, a leading semiconductor and software design company with a market capitalization of $164 billion, finds itself at a critical juncture as it navigates the rapidly evolving landscape of artificial intelligence (AI) and custom chip development. The company’s strong licensing and royalty revenues have positioned it well for growth, but rising operating expenses and market skepticism pose challenges to its long-term prospects. According to InvestingPro data, ARM maintains strong financial health with an overall score of 2.93, rated as "GOOD" by their comprehensive analysis system.

Want deeper insights? InvestingPro subscribers have access to 13 additional expert tips and comprehensive valuation metrics for ARM, helping investors make more informed decisions.

Financial Performance and Market Position

Arm’s recent financial performance has been marked by robust growth in licensing and royalty revenues, with current revenue reaching $4.12 billion and an impressive gross profit margin of 97.14%. Analysts project a 28% year-over-year sales growth in Q2, reflecting the company’s strong market position. The company’s sales are expected to grow from $4,007 million in FY25 to $7,855 million in FY28, showcasing its potential for sustained expansion. Based on InvestingPro’s Fair Value analysis, ARM currently appears to be trading above its intrinsic value.

However, the company’s earnings per share (EPS) growth trajectory faces some headwinds. While EPS is projected to increase from $1.48 in FY26e to $3.97 in FY28e, rising operating expenses are expected to impact profitability in the near term. This is reflected in the anticipated decrease in the price-to-earnings (P/E) ratio from 107.8 in FY26e to 40.1 by FY28e.

Arm’s market position remains strong, particularly in the CPU architecture space. The company has been trading at a discount compared to rivals like NVIDIA (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) since July 2025. However, some analysts argue that Arm’s performance relative to the SOXX index suggests it should trade at a premium due to its CPU dominance and potential in custom chips.

Product Segments and Growth Drivers

Arm’s growth strategy is centered around expanding its presence in key markets such as AI, automotive, and data centers. The company’s v9 architecture and compute sub-system (CSS) offerings are gaining traction, with the v9 attach rate now exceeding 30% of royalties. This trend is expected to continue, driving higher royalty rates and revenue growth.

The data center market presents a significant opportunity for Arm. Analysts project that Arm-based processors could power up to 50% of new hyperscaler CPU installations, marking a substantial expansion in this high-growth segment. This potential is reflected in ARM’s strong return on invested capital of 9% and robust current ratio of 4.99, indicating solid operational efficiency and financial stability.

Discover more about ARM’s growth potential with InvestingPro’s exclusive Research Report, part of our comprehensive analysis of 1,400+ top stocks.

Custom chip development is another area of focus for Arm, although this initiative is expected to unfold over a longer-term horizon of 3 to 5 years. Success in this domain could open new value capture opportunities and further solidify Arm’s market position.

Future Outlook and Challenges

While Arm’s long-term prospects remain positive, the company faces several challenges in the near term. Rising operating expenses, attributed to labor force expansion, are expected to pressure margins and earnings growth. This has led to some market skepticism regarding the company’s ability to maintain its projected growth trajectory.

The lack of comprehensive FY26 guidance has also raised concerns among analysts and investors. This reduced transparency, coupled with ongoing global economic uncertainties, has contributed to a cautious outlook for the company’s near-term performance.

Arm’s high exposure to consumer markets makes it vulnerable to macroeconomic fluctuations. Additionally, the company faces competitive pressures from established players in the semiconductor industry, as well as potential disruptions from emerging technologies.

Bear Case

How might rising operating expenses impact Arm’s profitability?

Arm’s recent financial reports indicate a significant increase in operating expenses, primarily due to labor force expansion. This rise in costs is expected to pressure margins and potentially slow earnings growth in the near term. Analysts have revised their earnings estimates downward, reflecting concerns about the company’s ability to maintain profitability while investing heavily in future growth initiatives.

The impact of these rising expenses is particularly evident in the company’s Q1 guidance, which suggests weaker earnings due to increased operating costs. If this trend continues, it could lead to a prolonged period of margin compression, potentially affecting investor confidence and the company’s valuation multiples.

What challenges does Arm face in the competitive semiconductor landscape?

Arm operates in a highly competitive semiconductor industry, facing pressure from established players like NVIDIA and AMD, as well as emerging technologies such as RISC-V. The company’s dominance in CPU architecture is being challenged as competitors invest heavily in AI and custom chip solutions.

Market skepticism could increase if Arm fails to maintain its technological edge or if competitors gain ground in key growth areas like data centers and AI. Additionally, the potential impact of global tariffs on end-demand for semiconductor products could create further challenges for Arm in maintaining its market position and growth trajectory.

Bull Case

How could Arm’s expansion into AI and data centers drive future growth?

Arm’s strategic focus on AI and data center markets presents significant growth opportunities. The company’s v9 architecture and compute sub-system offerings are gaining traction in these high-growth segments, with increasing adoption rates among customers.

In the data center market, Arm is well-positioned to capture a larger share of the CPU market. Analysts project that Arm-based processors could power up to 50% of new hyperscaler CPU installations, representing a substantial expansion opportunity. This growth in data center applications, coupled with the increasing demand for AI-optimized chips, could drive significant revenue growth and market share gains for Arm in the coming years.

What potential does custom chip development hold for Arm’s long-term prospects?

Arm’s exploration of custom chip development, while still in its early stages, holds significant potential for the company’s long-term growth. This initiative, expected to unfold over the next 3 to 5 years, could open new value capture opportunities and strengthen Arm’s position in the semiconductor value chain.

Custom chip solutions could allow Arm to address specific customer needs more effectively, particularly in emerging areas like edge AI and specialized data center applications. Success in this domain could lead to higher-margin revenue streams and deeper customer relationships, potentially insulating Arm from commoditization pressures in the broader semiconductor market.

SWOT Analysis

Strengths:

• Strong licensing and royalty revenues
• Dominant position in CPU architecture
• Growing presence in AI, automotive, and data center markets

Weaknesses:

• Rising operating expenses impacting near-term profitability
• Lack of comprehensive FY26 guidance
• Vulnerability to consumer market fluctuations

Opportunities:

• Custom chip development potential
• Expansion in data center and AI markets
• Increasing adoption of v9 architecture and compute sub-systems

Threats:

• Competitive pressures from rivals like NVIDIA and AMD
• Market skepticism about long-term earnings growth
• Potential impact of global tariffs on end-demand

Analysts Targets

• Morgan Stanley: $171 (October 9th, 2025)
• BofA Securities: $135 (May 8th, 2025)
• Barclays: $115 (May 8th, 2025)
• Morgan Stanley: $150 (May 8th, 2025)

This analysis is based on information available up to October 13, 2025.

InvestingPro: Smarter Decisions, Better Returns

Gain an edge in your investment decisions with InvestingPro’s in-depth analysis and exclusive insights on ARM. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore ARM’s full potential at InvestingPro.

Should you invest in ARM right now? Consider this first:

Investing.com’s ProPicks, an AI-driven service trusted by over 130,000 paying members globally, provides easy-to-follow model portfolios designed for wealth accumulation. Curious if ARM is one of these AI-selected gems? Check out our ProPicks platform to find out and take your investment strategy to the next level.

To evaluate ARM further, use InvestingPro’s Fair Value tool for a comprehensive valuation based on various factors. You can also see if ARM appears on our undervalued or overvalued stock lists.

These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.