Why Investors Are Thrilled as Chip Designer Arm's Stock Surges Nearly 50%

Highlights to Know

• Arm's shares skyrocketed 48% on Thursday after surpassing quarterly earnings forecasts and delivering strong future outlooks amid a surge in AI hardware demand.
• The company anticipates next quarter’s royalty revenue to exceed the previous quarter, driven by its v9 processor architecture which commands nearly twice the royalty rate of the older v8 design.
• Market analysts predict Arm will benefit significantly from the growing demand for AI-powered devices, especially high-end smartphones.
• Arm’s clientele includes top AI industry leaders such as Nvidia, Alphabet (Google’s parent company), Microsoft, and others.

Shares of Arm (ARM) experienced a remarkable jump of nearly 50% on Thursday after the semiconductor design firm exceeded quarterly earnings expectations and raised its annual outlook, fueled by soaring demand for AI processing technology.

Following these impressive results, numerous analysts increased their price targets for Arm stock, noting stronger-than-anticipated royalty revenues; however, Thursday’s rally has already pushed shares beyond some of these upgraded targets.

On Thursday, Arm’s shares closed 48% higher at $113.89, after peaking at $126.58 during intraday trading. Since its Nasdaq debut in September last year, the stock has surged 87%.

Arm generates revenue primarily through royalties from chip manufacturers licensing its designs. Its customer base includes some of the most valuable AI-focused companies globally, such as Nvidia (NVDA), Alphabet (GOOGL), Qualcomm (QCOM), and Microsoft (MSFT).

“We are engaged across virtually every market segment, with each sector integrating increasing computational power into their devices,” Arm CEO Rene Haas shared in a Thursday interview on CNBC.

After a stronger-than-expected fiscal third quarter, Arm forecasts even higher royalty revenue in the upcoming quarter, as its v9 processor architecture commands roughly double the royalty rate compared to the previous v8 generation.

Jefferies analysts highlighted Arm as a “key beneficiary of rising demand for edge AI devices, particularly premium smartphones.”

They emphasized that “China was the primary driver behind the better-than-expected fiscal Q3 results,” estimating that royalties, especially from premium smartphones like the Huawei Mate 60, accounted for the majority of this growth. This contrasts with Apple’s recent report of weaker iPhone sales in China amid intensified competition from domestic manufacturers.

Jefferies further noted, “We are witnessing the early stages of an AI-driven smartphone cycle, propelled by advanced chipsets such as Qualcomm’s Snapdragon 8 Gen 3 and Mediatek’s Dimensity 9300, both based on the v9 architecture.”

“The rising demand for AI-enabled smartphones is reinforcing Arm’s market position, as AI accelerates chip design activities and boosts licensing revenues.”

Bank of America analysts acknowledged that skeptics might point to fluctuations in licensing deals, China sales, and stock volatility, but emphasized that “they overlook the broader trend of accelerating royalty sales growing over 30% annually with highly profitable margins.”

The analysts added that Bank of America sees nearly every hyperscaler either developing ARM-based server CPUs internally or exploring ARM solutions from Nvidia (Grace Hopper) or other third-party suppliers. This trend could enable Arm to increase its market share from under 5% to between 10% and 15%, strengthening its competitive position against Intel (INTC) and Advanced Micro Devices (AMD).

CFRA noted that although royalty revenue exceeded expectations, “data centers remain Arm’s largest growth opportunity.”

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