Arm stock drops 3% despite record revenue fueled by AI demand

Key points

• Arm Holdings had record revenue in its fiscal Q3.

• The company saw a surge in royalty payments for its IP.

• So why was the stock down 3%?

Should investors be looking to buy the dip on this AI leader?   

Arm Holdings (NASDAQ: ARM) stock was falling on Thursday, down about 3.5% despite a strong quarter where the chipmaker posted record revenue.

UK-based Arm delivered revenue of $983 million in the quarter, up 19% year over year and a record for the company. That was higher than analysts’ consensus estimates of $949 million.

Net income spiked 190% for the company to $252 million, or 24 cents per share. Adjusted net income rose 26% to 39 cents per share, which was better than estimates of 34 cents per share.

Arm stock has been on a tear over the past 12 months, rising 128% to around $167 per share. It has gained about 33% already in 2025 year-to-date.

So, what caused the stock price to drop after strong fiscal Q3 earnings?

AI demand fuels earnings

Arm is a semiconductor company with a slightly different niche than other chip makers. It designs and licenses the intellectual property and architecture for CPU chips and then sells it to clients. The clients then use that architecture to develop their own customized chips. Its clients are a who’s who of the tech world, including NVIDIA, Apple, Microsoft, Taiwan Semiconductor, Samsung, Qualcomm, Intel, Google, and others.

So, Arm makes money in two primary ways, through licensing its designs and architectures to clients and then through royalty payments from each chip sold that contains the Arm IP. The royalty payments are a small percentage of the cost of each chip sold, 1% to 2%, but when you’ve shipped some 280 billion chips, and counting, that adds up.

Arm makes the bulk of its revenue from these royalty payments. In the most recent quarter, Arm made $580 million of its $983 million in royalty payments, or roughly 59%. That was up 23% and was a record for royalty revenue. The rest, $403 million, comes from licensing the IP to its clients.

The surge in licensing agreement and royalty payments stems from high demand for its AI-enabled designs, specifically its Armv9 architecture.

“Licensing demand remains strong as our AI partners make long-term commitments to more, and more powerful, energy efficient Arm technology, including AI training and inferencing,” said CEO Rene Haas and CFO Jason Child in the shareholder letter. “This has translated to excellent financial performance for the quarter. Q3 revenue was an all-time high and exceeded the high end of our guidance range on record royalty revenue and better-than-expected licensing revenue.”

Why the stock was moving lower

Arm made some other moves that should bode well for future earnings. One was joining Oracle and SoftBank’s $500 billion Stargate project to develop AI infrastructure and data centers. Arm is a technology partner. It also formed a partnership with SoftBank, its majority owner, and OpenAI, called Cristal Intelligence, to “enable AI agents that solve increasingly complex problems.” These partnerships will help strengthen Arm’s role in the AI ecosystem.

Arm also released guidance for its fiscal Q4 and full year. The company calls for revenue of $1.175 billion to $1.275 billion, which would be a record and up from $983 million this quarter. But estimates of $1.22 billion were at the higher end of this range, which may have disappointed some investors. Adjusted earnings are 48 cents to 56 cents, which would be up 23% to 43% over Q3.

For the full year, Arm targets $3.94 billion to $4.04 billion in revenue, which is in line with estimates of $4 billion. Adjusted EPS is targeted at $1.56 to $1.64 per share, compared to estimates of $1.56 EPS.

Overall, the guidance is pretty much on target with what analysts anticipate.

So, the primary reason for the drop is that investors just see Arm as too overvalued already with a high P/E ratio of 228 and a forward P/E of 87. Buying high, despite the strong earnings, did not appeal to most investors. So, many likely decided to take some profits and wait until the valuation gets more attractive to dive in again.