ARM stock jumps 9% ahead of earnings: can AI bets justify valuation?

ARM Holdings is set to report its fourth-quarter earnings on Wednesday afternoon, with investor attention focused on its strategic shift into designing its own data center CPU and the implications for its elevated valuation.

Shares of the chip designer traded 9% higher on Wednesday ahead of the results, reflecting continued optimism around its positioning in artificial intelligence and data center markets.

However, expectations for near-term financial performance remain relatively modest compared to the company’s long-term ambitions.

Earnings expectations remain steady

Analysts polled by FactSet expect ARM to report adjusted earnings of around 58 cents per share for the quarter, compared with 55 cents a year earlier.

Revenue is projected to reach approximately $1.5 billion, marking a 19% increase year-over-year.

The relatively limited growth in earnings reflects expectations of rising expenses as the company invests in its next phase of expansion.

ARM’s most recent quarterly performance in February exceeded expectations, with revenue of $1.24 billion and adjusted earnings of 43 cents per share, both ahead of analyst forecasts.

Revenue grew 26% year-over-year, driven by demand across artificial intelligence, data centers, smartphones, and edge computing.

Chief executive Rene Haas said demand for AI computing on ARM's platform "continues to accelerate."

Strategic shift toward data center CPUs

At its core, ARM develops an instruction set architecture that acts as the interface between software and CPU chips, serving as a major alternative to the x86 architecture used by Intel and Advanced Micro Devices.

The company also designs chip components and generates revenue through licensing and royalties from major customers, including Apple, Nvidia, Samsung, and Qualcomm.

ARM-based chips have historically dominated low-power devices, particularly in mobile computing, where their efficiency has made them the preferred choice.

Over time, the ecosystem has expanded significantly, making ARM the most widely used instruction set globally.

More recently, ARM’s architecture has gained traction in higher-performance applications, including personal computers and data centers.

Major cloud providers such as Amazon Web Services, Microsoft Azure, and Google Cloud now offer custom ARM-based CPUs for customers.

The company is now taking a significant step by developing its own data center CPU, known as ARM AGI.

The chip is expected to be deployed in servers alongside Meta Platforms’ custom AI chip, MTIA, mirroring integrated systems offered by companies like Nvidia and Google.

This move places ARM in direct competition with some of its own customers, marking a notable shift in its business model.

Valuation rises on long-term AI expectations

Despite the strategic expansion, ARM has indicated that revenue from its AGI CPU will not become financially material until fiscal year 2028.

Nevertheless, investor enthusiasm has driven the stock to elevated valuation levels.

The company is projecting up to $15 billion in annual AGI-related sales by fiscal year 2031, compared with $4.7 billion in revenue over the past 12 months.

This outlook has contributed to a forward price-to-earnings ratio of around 93, significantly above the S&P 500’s multiple of 21.

Technical indicators suggest continued bullish momentum.

The stock is trading near the top of its 52-week range, with a positive MACD signal and a relative strength index of 63.94, indicating strong but not overextended momentum.

A “golden cross” formed in April, with the 50-day moving average rising above the 200-day average.

Analysts remain broadly positive. Wells Fargo recently raised its price target to $220, maintaining an Overweight rating.

Analyst Joe Quatrochi said ARM remains well-positioned to benefit from long-term AI adoption, citing royalty tailwinds from data center demand and growing traction in AI workloads.

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