Arm (ARM.US) stock price "rollercoaster" after Q4 results: the chill of the smartphone market persists, AI data centers become growth lifelines, in-house chips face production capacity constraints.

Arm Holdings released its financial report for the fourth quarter of the 2025 fiscal year ending in March after the market closed on Wednesday, with sluggish growth in the smartphone industry suppressing the company's key source of revenue. However, the expansion of the artificial intelligence data center business is expected to offset the decline. The data shows that the company's quarterly revenue increased by 20% year-on-year to $1.49 billion, higher than the market's expectation of $1.47 billion; net profit reached $641 million; adjusted earnings per share were 60 cents, also exceeding expectations. After the performance announcement, the stock price experienced significant fluctuations, rising by 12.6% at one point, then quickly dropping, falling nearly 10% at one point. For the next quarter, the company expects first-quarter revenue to be approximately $1.26 billion, slightly higher than the analyst average expectation of $1.25 billion; adjusted earnings per share are expected to be 40 cents, while the market widely expects 36 cents. Despite the seemingly impressive performance, investors are not completely reassured. After the financial report was released, Arm's stock price rose more than 12% in after-hours trading, then quickly reversed, and as of the writing, the stock had fallen by approximately 6.03%. Company executives said during the analyst conference call that they have not confirmed sufficient supply chain capacity to meet the demand for a new chip, while analysts delved into questions regarding the costs of their self-developed chip business. The fluctuation in market sentiment reflects the complex judgment of investors on the slump in the smartphone market, lower-than-expected royalty income, and the risks in the self-developed chip supply chain. Weakness in the smartphone market drags down royalty income, with pressure on the low end but stability on the high end Arm holds a significant position in the vast handheld device market, driving almost every smartphone globally with its designs. The company's business model heavily relies on the smartphone industry, generating profits by charging royalties for every device shipped. However, this core business is facing challenges, as the shortage of storage chips is putting pressure on the industry, which leads to increased prices for consumer electronics and dampens sales, potentially affecting Arm's royalty income. In the fourth fiscal quarter, Arm's royalty income was $671 million, below the market's expectation of $693 million to $697 million. CEO Rene Haas admitted during the conference call that smartphone shipment growth turned negative in the previous quarter, mainly affected by factors such as the shortage of storage chips, weak demand for consumer electronics, and the contraction of the low-end smartphone market. However, Haas also pointed out that the weakness is primarily concentrated in the low-end market, while Arm's royalty income relies more on high-end models, so overall impact remains manageable. Nevertheless, the structural weakness in the smartphone market casts a shadow over Arm's short-term performance. Downstream chip manufacturers like Qualcomm have also released similar warnings in the past. Qualcomm, a smartphone chip design company, provided a bleak quarterly revenue forecast last week due to storage issues, but its stock rose due to optimistic statements about demand rebounding. Strong demand in AI data centers becomes the core of growth In stark contrast to the weakness in the smartphone business, the strong demand in AI data centers is becoming Arm's most eye-catching growth driver. Cloud computing companies are increasing their investments in AI infrastructure, and Arm's architecture, with its low power consumption and high performance advantages, is rapidly gaining market share in this field. Haas stated, "We are very bullish on the demand for data centers." He revealed that royalty income related to data centers in the current quarter will see "substantial growth." Authorization revenue in the fourth fiscal quarter reached $819 million, surpassing the expected $775 million, indicating strong interest from customers in using Arm technology for AI computing and other scenarios in the future. AMD previously anticipated that the market's annual growth rate for server CPUs could exceed 35%, reaching over $120 billion by 2030. As the underlying architecture licenser, Arm is benefiting deeply from this trend. Arm is currently experiencing a "dual-speed" growth phase, with traditional smartphone business under pressure, but AI data centers and self-developed chips providing strong upward potential. Self-developed chip strategy: Massive opportunities and supply chain bottlenecks To further seize the wave of AI computing power, Arm has extended from a pure design licensing model to the self-developed chip field. The AGI CPU (an AI chip for data centers) released by the company at the beginning of the year is designed to handle large-scale computations required for AI agents to perform tasks with minimal supervision. Arm expects this product to bring in over $2 billion in revenue between 2027 and 2028, with $1 billion in orders already announced. However, during the financial report conference call, Haas admitted that the company has not secured sufficient supply chain capacity for an additional $2 billion in orders. "We are working closely with the supply chain to meet the demand." This statement raised concerns among analysts about the costs and production capacity of self-developed chips. Arm's profit model is divided into two types: licensing fees (allowing customers to use their designs and standards) and royalties (charged based on the actual number of chips shipped). The sale of proprietary brand chips is a significant transformation for the company - previously, Arm had benefitted from the industry as a neutral technology vendor. How to obtain higher profits without disrupting the existing licensing ecosystem will be a test for Arm. The chip manufacturer, which went public in 2023, is currently controlled by SoftBank Group from Japan. SoftBank appointed Haas to take on a broader role within the group in April, where he will lead the international business of SoftBank and assist founder Masayoshi Son in advancing the AI chip manufacturing plan. While continuing as Arm's CEO, Haas will also be responsible for SoftBank's international department based in San Carlos, California, and coordinate collaboration between chip and AI companies within the group. SoftBank currently holds nearly 90% of Arm's shares and has also acquired chip companies such as Ampere Computing LLC and Graphcore Ltd. in recent years.