Arm and the curse of smartphones: when AI hype isn't enough to save the stock

Today's technology market resembles a casino where every table has a bet on two letters — AI. British holding Arm, whose architectures are in the pocket of almost every person on the planet, seemed like the perfect favorite in this game. However, the company's latest financial report acted like a cold shower for optimists. Despite the fact that the company is setting records in the server segment, its stock fell 8%. This is a classic story of how inflated expectations collide with the inertia of the real world.

Let's figure out what went wrong. On paper, Arm looks decent. Revenue is growing, and the transition to the new Armv9 architecture is progressing ahead of schedule. For those who don't follow core revisions: v9 allows Arm to collect twice as much in licensing royalties from each chip compared to the previous generation. This is a "cash cow," especially in an era when Apple, Samsung, and other giants are trying to squeeze the maximum from local neural network computations. It would seem like everything is fine, but there's one catch — market volume.

The problem is that Arm has become a hostage to its own dominance in the smartphone market. This market has long been mature, if not to say aging. People no longer change phones every year, and "revolutionary" AI features in new models are not yet causing the average buyer to immediately rush to the store. As a result, we see a paradox: every chip sold brings Arm more money than before, but not enough chips are being sold to satisfy Wall Street's appetite. Investors are used to thinking of AI as a rocket, but Arm currently looks more like a heavy truck trying to accelerate on a steep climb.

At the same time, the company's server division is indeed doing great. Cloud giants like Amazon, Google, and Microsoft are increasingly abandoning traditional x86 solutions in favor of their own chips based on Arm Neoverse. In the world of data centers, where electricity bills make up the lion's share of expenses, Arm's energy efficiency becomes a deciding factor. Training and running large language models requires enormous resources, and here the British architecture wins the optimization battle. But, unfortunately for SoftBank (Arm's owner), server successes cannot yet fully offset the stagnation in the mobile sector, which for decades has been the foundation of the company.

Don't forget about the psychological factor either. SoftBank CEO Masayoshi Son has long promoted Arm as the "center of the AI universe." When the bar of expectations is raised to the stratosphere, any slowdown is perceived as a catastrophe. The market expected Arm to show the same growth rates as Nvidia, but Arm is not Nvidia. They don't sell ready-made shovels for the gold rush, they sell the blueprints for those shovels. This is a more stable, but less explosive business. The current stock correction is not a sign of collapse, but a return to reality after a long period of euphoria.

Moreover, RISC-V looms on the horizon as a threat. This is an open architecture that allows companies to design chips without paying royalties to Arm. For now, this solution is popular mainly in controllers and embedded systems, but Chinese companies, fearing sanctions, are actively investing in this direction. If Arm cannot prove that their license is worth the money they're asking for, competition will become even fiercer. The company is now at a point of transformation: it needs to finally stop being a "phone" company and become an "infrastructure" company.

The bottom line: AI really does help Arm make more money on every server, but the company is still too heavily dependent on whether you want to buy a new smartphone this year. Can the v9 architecture become the standard for PCs and servers faster than the mobile market deflates?