Arm Holdings stock in correction even as AI royalties set a quarterly record

The semiconductor sector's AI capex cycle has produced a growing disconnect between operating results and share prices. Arm Holdings (ARM) is a case in point: the stock has retreated 36.3% from its 52-week high on profit-taking and smartphone demand concerns, even as the company reported first-quarter fiscal 2027 revenue of $1.29 billion, up 22% year-over-year.

Royalty revenue reached a record $715 million for a first quarter, also up 22%, with cloud AI as the largest single contributor. Data-centre royalties more than doubled from a year ago as hyperscale cloud providers expanded deployments of Arm-based processors. License and other revenue rose 23% to $574 million, driven by renewed long-term agreements and new customer wins across multiple industries.

The architecture's expanding footprint

The more commercially significant shift is structural. Arm's Armv9 architecture and Compute Subsystems carry higher royalty rates than earlier product generations, which means the company can grow royalty revenue even as smartphone shipments remain under pressure from weaker consumer demand and elevated memory prices. That rate structure decouples Arm's royalty line from unit volumes in its oldest end market.

The broader AI infrastructure cycle is pulling the architecture deeper into the data centre. The company has shipped more than 1.5 billion Neoverse CPU cores to date, with shipments accelerating. Arm is also gaining traction in networking chips, specifically data processing units and SmartNICs, both increasingly used in AI infrastructure deployments. Beyond the data centre, the architecture is expanding into advanced driver-assistance systems, autonomous vehicles, robotics, and industrial automation, reducing Arm's dependence on the handset cycle.

The newest growth driver is the Arm AGI CPU, introduced to extend the Arm Compute Platform into AI infrastructure. Initial shipments have begun. Management says it has secured manufacturing capacity to support approximately $1 billion in revenue across fiscal 2027 and fiscal 2028. Customer demand has already exceeded $2 billion, according to the company, a figure management says could make the initial revenue outlook look conservative if production scales as planned.

Against the backdrop of that diversification, the macro caveat is the smartphone market itself. Consumer demand there has not recovered and memory prices remain elevated. A prolonged handset downturn would slow the rate at which Arm's higher-value product mix offsets legacy weakness. Wall Street's consensus rating on the stock stands at Moderate Buy.