Arm expands its business: cash flow under market scrutiny

In the age of Artificial Intelligence (AI), tech stocks are often sold off following the publication of quarterly results. Given the extremely high share prices, even the slightest deviation from expectations and estimates is enough for the market to sell off. This has also happened to Advanced RISC Machine Holdings (ARM). The British group, a global leader in the design of microprocessor architectures, fell by 13.4 per cent in a single trading session following the announcement of its latest quarterly figures (the first quarter of the 2025–2026 financial year). Among other factors, the weak outlook for the second quarter weighed on the share price. Non-GAAP diluted EPS is forecast to be between $0.29 and $0.37. This estimate – at its midpoint – falls short of analysts’ expectations.

However, according to several experts, the real reason for the slump is something else. What is it? The fact that Arm has announced a significant change. The group has decided to move beyond the confines of its business model – which until now has been based solely on licensing the use of its intellectual property – and has announced its entry into the design of physical chips. ‘We are not becoming a chip company in the traditional sense,’ the company said, ‘(...) but we will be going deeper into silicon to accelerate adoption by our customers.’This shift has a specific aim: to shorten development times for users and increase the share of value captured by Arm in each project.

So, is it all as easy as drinking a glass of water? Not exactly. Investors, in fact, reacted negatively straight away. According to CFRA Research, ‘the new strategy increases the risk profile and reduces visibility on margins’. And that’s not all. Some market participants are talking about ‘a move that could put Arm in potential competition with various clients’. Barron’s itself went on to point out that ‘the group is entering unfamiliar territory, with higher costs and returns deferred over time’. Against this backdrop, selling pressure ensued. Subsequently, however, the share price recovered somewhat. “Currently,” explains independent technical analyst Silvio Bona, “the shares are trading in a sideways pattern.” Looking at the last two and a half months, the share price fell to “support around the $130 mark and, from there, rebounded”. Clearly, traders are on standby and are (also) pondering the group’s new strategy. “Over the longer term, however, the underlying trend remains bullish. The share price reached an all-time high – on a closing basis – of $186 on 10 July 2024. Subsequently, Arm slipped lower – finding support around the $86 mark on 8 April – before recovering towards the resistance zone around $165.”That said, the market is currently in a wait-and-see mode: it is trying to work out whether the new strategic move will bring added value or not.

So far, we have looked at some ideas regarding valuations and new approaches. But what are the group’s strategic priorities? To answer this, it is useful, first of all, to recall how Arm generates its revenue. The model is based on licences and royalties, with the company (to date) granting only the rights to use its intellectual property. Each contract includes an initial fee, known as an ‘up-front’ payment, which is paid upon signing. The amount varies depending on the scope of the licence. This sum covers access to digital designs, development software and technical support. Once the licence has been obtained, the customer can design and manufacture chips incorporating Arm technology. When production begins, the royalty comes into play. This is a percentage applied to the unit value of the chip sold, generally ranging from 0.5 per cent to 2 per cent. The rate depends on the type of intellectual property, the end market and the year of the contract.

Well, broadly speaking, the aim is to increase the average revenue per microprocessor. This objective is pursued – primarily – through four avenues. The first is to encourage customers to migrate to more advanced architectures. Armv9, the successor to Armv8, is already the benchmark platform for smartphones, data centres and the automotive sector. Every technological leap increases complexity, performance and also the royalty rate. Newer generations are worth more and cost more. For manufacturers, this is a necessary investment: better performance and lower power consumption, but also access to an ever-expanding software ecosystem.