Arm Holdings (ARM 2.27%) fell after its recent earnings report, though investors didn't know quite what to make of its quarter.
The stock initially jumped in after-hours trading on Wednesday, before pulling back during the earnings call. Investors seemed to like that the company beat estimates on the top and bottom lines and that data-center royalty revenue more than doubled year-over-year.
However, on the earnings call, management said that while demand for its new AGI CPU was stronger than expected, it was unsure whether it could fulfill it due to supply chain constraints.
Arm had prepared for $1 billion in revenue over the next two fiscal years (2027 and 2028), but said that demand is more than double that, exceeding $2 billion. Like its fabless chip stock peers are finding, capacity is tight. According to CFO Jason Child, who spoke to the Motley Fool, the biggest supply chain constraint is wafer capacity with Taiwan Semiconductor Manufacturing (TSMC), as TSMC is basically sold out of capacity. The other issue is the lack of supply of memory chips for its key partners like Meta Platforms and OpenAI, as they need to secure memory in order to purchase the CPU from Arm.
Image source: Getty Images.
A good problem to have
While investors are focused on the supply chain issues, the outsize demand for the new CPU shows that the new chip will pay off for Arm, even if it will take longer to fulfill demand.
Over the long term, the supply chain issues should be less of a challenge, and Arm is forecasting $15 billion in annual revenue from the CPU in fiscal 2031 and $25 billion in total revenue that year.
One prediction from CEO Rene Haas signaled that the company could surpass that target, and potentially by a wide margin. On the earnings call, Haas said, "And I'm actually confident that by the end of the decade, I believe the largest market share by CPU type will be Arm."
Haas is referring to the competition between Arm and the x86 CPU platform used by Intel and AMD. Arm's architecture has an advantage in power consumption over the x86, which is why it's favored in smartphones and is gaining share in the data center, where energy costs are high. It's also made Arm a popular choice in robotics and physical AI.
Arm forecast a $100 billion total addressable CPU market five years from now, while AMD sees a $120 billion TAM. If Arm has a majority of that market by 2031, it would be set to bring in significantly more revenue than $25 billion.
Of course, the market share Haas is referring to won't be the AGI CPU. Arm's IP business, which involves licensing its CPU and compute subsystems (CSS) architecture, also factors into that market share. Still, if Arm can succeed in being the market share leader by then, the stock is likely to move significantly higher.
NASDAQ: ARM
Key Data Points
What 2031 could look like
Arm's forecast for 2031 is likely conservative, as companies aim to give guidance they are confident they can hit, and the further out the forecast, the greater the risk.
Arm's forecast is informed by the capex projections of its top customers, including the hyperscalers, who are set to spend $700 billion in capex, and how much market share it could gain.
The excess demand is therefore a great sign for customer interest, and CFO Child allowed that the company could hit its target of $15 billion in revenue from the CPU sooner than the 2031 forecast.
The company won't bring in any revenue from the AGI CPU until Q4 2027, which ends next March, so it will be a few quarters before investors get hard numbers on CPU, but the upside potential is considerable as Arm could blow through that 2031 forecast.
