Is Arm Stock a Buy on the Dip as Agentic AI Opportunity Emerges?

Arm Holdings (ARM) shares experienced a significant drop after the company's Q3 earnings report on November 4. Despite this decline, the stock has still risen more than 50% year-to-date, though it has lost more than 60% from its 52-week high. Management expressed renewed confidence in securing enough CPU supply to achieve $2 billion in revenue by fiscal years 2027 and 2028. With shipments commencing later this year, Arm anticipates hitting this target within five and a half fiscal quarters.

Traditionally utilizing a licensing and subscription model, Arm announced this year that it would begin manufacturing its own chips for the first time, capitalizing on the growing data center CPU market. The company projected a 15% market share in a projected $100 billion market by 2031. Nvidia and Advanced Micro Devices estimate the market to reach $220 billion by 2030 due to the surge in agentic AI.

ARM's newly introduced Artificial General Intelligence (AGI) CPUs reportedly offer double the per-rack performance compared to AMD's EPYC 9755 CPU.

Notably, the demand for AGI CPUs is not the primary concern for investors; rather, it's the company's ability to produce chips in a tight market for components and fab capacity. However, Arm's management is optimistic about reaching its ambitious $2 billion CPU goal. The company's data center royalty revenue doubled in the quarter, and it anticipates this trend to continue growing in the triple digits over the next few years as data centers transition from x86 architecture to ARM-based solutions. Arm holds a 50% server market share among large hyperscalers, up from 60% at the end of 2025.

In fiscal Q2, Arm's overall revenue increased by 27% to $1.44 billion, while annualized contract value rose 12%. License revenue surged by 50% year-over-year to $773 million, driven by new Arm Total Access agreements and compute subsystem licenses. Royalty revenue grew by 8% year-over-year to $670 million, fueled by the adoption of higher-cost Armv9 architecture and Arm CSS platform, alongside expanding data center business.

Despite challenges in the smartphone market, Arm projects a 24% year-over-year revenue growth for fiscal Q3, with license revenue expected to increase roughly 50%. Adjusted earnings per share are forecasted between $0.52 and $0.60.