Ever heard of ARM Holdings (NASDAQ:ARM)? It’s a $140 billion company you rarely hear in the same breath as Nvidia or Apple – yet its architecture underpins every chip Apple designs and the custom CPUs inside Nvidia’s top AI superchips.
Arm logo displayed on a screen and and microchip are seen in this illustration photo taken in Krakow, Poland on September 14, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
NurPhoto via Getty Images
Now here’s the blunt, four-line math that makes ARM the poster child of the AI valuation bubble.
$140 billion market cap on $4 billion in annual revenue$808 million in GAAP operating profit for FY’25, and $653 million in net income.That means ARM trades at over 200x earnings.For comparison: Nvidia is ~50x. Google, Microsoft, Amazon? All under 30x.
It’s absurd. So what exactly is the market assuming ARM will magically do?
The Impossible Expectations
For ARM to justify a 200x earnings multiple, investors are effectively pricing in a full-blown Perfection Scenario – a future where everything goes right, at maximum intensity, for the next five years.
To make the math work, ARM would need to achieve both of the following:
Revenue must triple to roughly $12.5 billionGAAP net margins must double to around 40%
These aren’t optimistic goals – they’re mandatory assumptions baked into today’s valuation. And here’s the problem: the structural reality of ARM’s business model makes this outcome highly unlikely.
The Structural Problem: ARM Can’t Reach 40% Margins
Reaching 40% GAAP net margins is a fantasy when ARM currently operates at 16% for FY’25 and about 19% over the last 12 months.
ARM is a people-intensive engineering company competing with industry giants. Its R&D bill consumes a staggering 52% of revenue – compared to just 9% for Nvidia. Much of this cost is tied to stock-based compensation (SBC). Hitting a 40% margin would require slashing SBC, which would trigger an immediate talent exodus and cripple innovation.
And even before margins, the idea that revenue can triple is shaky. Smartphone and PC growth is tapped out – Apple pays a flat fee, and higher royalties would require 30%+ of users suddenly buying “Pro” devices. That means the entire growth story hinges on the data center.
But the data-center opportunity is widely misunderstood.
Data Centers: Low Royalties, High Hype
Here’s the inconvenient truth: most of ARM’s data-center volume – driven heavily by AWS Graviton – carries a low 3–5% royalty because of high volume and custom-design license agreements. For ARM’s revenue to triple, it would need a massive shift toward its CSS (Compute Subsystems) product, which commands a far higher ~10% royalty.
But the reality is the low-royalty model dominates the market. Yet investors are valuing ARM as if the entire data-center segment will magically convert to the premium 10% rate – a scenario that makes little sense. Amazon and Nvidia don’t use CSS. Microsoft does, but mainly because it was late and needed a fast catch-up solution. Long term, this mix won’t hold.
And the bigger problem? ARM faces a growing, royalty-free alternative.
RISC-V Alternative: A Competitive Threat
The long-term risk to ARM’s pricing power is the maturation of open alternatives.
The open-source, royalty-free architecture RISC-V is the industry’s ultimate escape hatch. RISC-V offers extreme customization for AI/specialized workloads and is royalty-free – a vital financial advantage over ARM’s mandatory fees.
Google, Meta, and Qualcomm are heavily invested in RISC-V, actively working to remove the need for ARM’s architecture license.
How Might ARM Valuation Turn Out Fine?
Could ARM revenues 4x and margins 2x over the next 3 to 5 years? Difficult, but not impossible.
For that to happen, the company would need the following specific market actions and product adoption:
Customer Adoption: Microsoft and Google (who use the high-margin CSS product) must displace both Intel/AMD and the established low-royalty AWS Graviton fleet to become the dominant cloud chip providers.Product Mix: ARM must accelerate the adoption of CSS globally, pushing the average royalty rate up significantly.Market Share: ARM must achieve management’s aggressive target of 50% market share in the data center by 2026/2027, up from about 15% today.
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