Arm Holdings reported its fiscal second quarter on November 4, 2026 and delivered what should have been a clean beat. EPS came in at $0.52 against a $0.47 estimate, and revenue reached $1.44 billion versus $1.38 billion expected. Both figures cleared the bar. The stock still lost roughly 12% the next day.
The selloff has a specific cause, and understanding it matters more than the headline decline.
The Business
Revenue climbed 27% year over year to $1.443 billion, with licensing and other revenue jumping 50% to $773 million. Royalties rose a slower 8% to $670 million, even as data-center royalties doubled. That divergence is what investors are picking apart. Licensing revenue reflects agreements signed today; royalties reflect chips actually shipping and generating fees. When licensing runs far ahead, the market wonders how long conversion takes.
Management said third-quarter royalty revenue growth is expected to be low single digits year over year due to a “tough year-on-year comp.” That alone is enough to trigger selling in a stock that still trades at a premium multiple.
Why Wall Street Is Paying Attention
The royalty deceleration is a timing issue, not a structural one. The underlying share gains are real. Arm-based server market share at the top hyperscalers more than tripled, from 15% in calendar 2024 to more than 50% in calendar 2025, and management expects that share to exceed 60% by the end of calendar 2026.
Management expects data center royalties to grow at a triple-digit rate over the next several years as partners transition from x86 to Arm-based head nodes. That is the royalty engine that licensing revenue is pre-funding right now.
What’s Driving the Opportunity
There is a second growth vector most of the post-earnings coverage has underweighted. Management raised its optimism on the AGI CPU, now expecting that product to generate up to $2 billion in cumulative revenue across fiscal 2027 and 2028. First commercial deliveries remain on track for the fourth quarter of fiscal 2027.
Arm has said its Armv9 architecture typically commands roughly twice the royalty rate of an equivalent Armv8 product. Separately, Nvidia has discussed demand of approximately $20 billion in total server CPUs in fiscal 2027, and its Vera CPU is Arm-based. Every Vera unit shipped puts money directly into Arm’s royalty line at the higher rate.
The CPU demand picture extends beyond Arm’s royalty line. AMD’s data center revenue nearly doubled year over year as server demand accelerated, yet inventory and free cash flow became the next pressure point.
What Could Go Wrong
Valuation remains the obvious risk, but the specific multiples move with both the stock and estimate revisions. Even after the post-earnings drop, Arm still trades at a premium multiple. Licensing supplied roughly 54% of sales this quarter, leaving investors watching whether those agreements can generate faster recurring royalty growth as customers move chips into production. If that conversion drags into fiscal 2028, the valuation can compress further before it expands.
That pattern is not unique to Arm. Nvidia’s record $81.6 billion quarter also sent the stock lower when estimates had quietly been raised above guidance, illustrating how valuation resets when the bar outpaces even exceptional results.
The Bottom Line
Arm’s architecture is backed by a vast software ecosystem, with Arm describing more than 30 million developer hours. Its Neoverse cores run Google Axion, AWS Graviton, and Microsoft Cobalt. That installed base does not unwind because one quarter’s royalty line grew 8% instead of 20%. The selloff today is a valuation reset driven by near-term royalty timing, not a verdict on the architecture’s relevance. For portfolios with a two-year horizon, a 40%-plus drawdown from the September peak, against a business converting hyperscaler infrastructure to its own instruction set, is worth serious attention.
