Understanding Arm Holdings: A Key Player in Semiconductors
Arm Holdings (NASDAQ: ARM) may not attract as much buzz as other chip designers like Nvidia, but it plays a critical role in the semiconductor sector. Its designs appear in over 99% of smartphones, making it a central figure in the industry. According to the company, it boasts the most widespread CPU architecture globally, surpassing traditional competitors such as Intel and AMD.
Arm has a distinctive approach in the semiconductor field. Instead of selling chips directly, the company licenses its designs, particularly for CPU architectures, and earns royalty revenue based on product sales. Typically, between 60% and 70% of its quarterly revenue comes from royalties, with the rest stemming from technology licenses.
Decoding Arm Holdings Stock
The valuation of Arm’s stock is notably high, which can be attributed to its unique business model. The company generates income through two primary channels: licensing contracts and subsequent royalties. It often takes 2-3 years after a contract is signed for products to hit the market and for royalty payments to commence.
As a result, Arm’s existing royalty revenue may not fully reflect the current surge in AI. Nevertheless, management has indicated increasing demand related to AI applications.
To gauge Arm’s performance, it’s helpful to monitor key metrics such as revenue growth from both licensing and royalties, operating margins, and earnings per share. A crucial indicator that reveals technology adoption trends is its royalty revenue categorized by architecture, presented in the chart below.
Image source: Arm Holdings.
The V9 architecture, also known as Version 9, plays a significant role in the graph. As Arm’s latest CPU design, it commands a royalty rate that is twice that of the previous version, v8. While v9’s contribution to revenue has been relatively stable at around 25% for the past three quarters, this stability signifies robust growth in Arm-based products overall, with royalty revenue experiencing a 23% increase in the fiscal third quarter.
Investors should monitor the revenue contribution from v9 and the overall revenue growth trajectory. This new version is likely to capture a greater market share from older CPU models, while sustained growth from v8 and earlier architectures hints at Arm’s long-term market potential.
Is Now the Right Time to Invest in Arm Holdings?
Before deciding to invest in Arm Holdings stock, it’s essential to consider the following:
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Jeremy Bowman holds positions in Advanced Micro Devices, Arm Holdings, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, and Nvidia. The Motley Fool also recommends the following options: short May 2025 $30 calls on Intel. For more, please refer to the Motley Fool’s disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
