Arm Holdings plc (ARM Quick QuoteARM - Free Report) has gained 4% since announcing its second-quarter fiscal 2027 results on Nov. 4, 2026, suggesting investors are increasingly recognizing the company's expanding artificial intelligence (AI) opportunities. The sustained post-earnings appreciation warrants a closer look at its growth prospects, especially after management's encouraging revenue guidance and growing confidence in its emerging silicon business.

                                                        Image Source: Zacks Investment Research

Arm Holdings reported revenues of $1.44 billion, surpassing the Zacks Consensus Estimate of $1.37 billion. Non-GAAP earnings of 52 cents per share exceeded the consensus mark of 48 cents. Although strong licensing revenues supported the earnings beat, the company's ambitious AI processor expansion and upbeat outlook provide additional reasons for investor optimism.

ARM's Upbeat Q3 Guidance Supports Investor Confidence

ARM anticipates third-quarter fiscal 2027 revenues of $1.54 billion, plus or minus $50 million, implying approximately 6.7% sequential growth at the midpoint. The company expects non-GAAP earnings of 56 cents per share, plus or minus 4 cents, indicating 7.7% sequential growth at the midpoint.

License and other revenues are projected to increase slightly more than 50% year over year, reflecting continued customer commitments to ARM's intellectual property. Royalty revenues are expected to increase in the low teens sequentially, although year-over-year growth is anticipated to remain in the low single digits.

The encouraging revenue guidance, particularly the strength expected in licensing, offers a plausible explanation for ARM's post-earnings appreciation. However, slower royalty growth suggests that near-term expansion remains uneven across revenue streams.

ARM's Revenue Growth Highlights Strong Licensing Demand

Arm Holdings' second-quarter fiscal 2027 revenues increased 27% year over year from $1.14 billion and approximately 12% sequentially from $1.29 billion. The latest quarter marked its fifth consecutive period of revenue growth exceeding 20%.

License and other revenues surged 50% year over year to $773 million from $515 million and increased approximately 34.7% sequentially from $574 million. This business accounted for approximately 53.6% of total revenues compared with 45.4% a year earlier.

Accelerating demand for long-term technology agreements drove licensing growth. However, the $209 million contribution from SoftBank-related licensing and design services highlights the importance of large agreements to reported results.

Royalty revenues increased 8% year over year to $670 million from $620 million but declined approximately 6.3% sequentially from $715 million. The contrast indicates that licensing, rather than broad-based royalty acceleration, accounted for most of the recent revenue momentum.

Data Center Expansion Strengthens ARM's AI Growth Prospects

Data center royalty revenues doubled year over year, supported by growing adoption of Arm-based processors among hyperscale cloud operators. Meanwhile, physical AI royalty revenues advanced 50%, demonstrating expanding opportunities in robotics, automotive systems and other intelligent devices.

Conversely, edge AI royalty revenues remained approximately flat year over year, highlighting differing growth trajectories across end markets.

Arm's recently introduced AGI CPU strengthens its transition beyond intellectual property licensing into silicon products. Customer purchase orders already extend into calendar 2027, with commercial shipments scheduled to begin in the fourth quarter of fiscal 2027.

Management's confidence in generating up to $2 billion in cumulative AGI CPU revenues across fiscal 2027 and 2028 has strengthened, supported by improving customer demand and supply arrangements.

However, initial AGI CPU gross margins are expected to range between 30% and 40%, substantially below Arm's traditional licensing margins. This creates a potential profitability trade-off as silicon revenues become increasingly important.

ARM's Operating Margins Improve Despite Rising Investments

Arm generated non-GAAP operating income of $638 million, increasing 37% year over year from $467 million. Non-GAAP operating margin expanded 310 basis points to 44.2% from 41.1%, demonstrating improved operating leverage.

Non-GAAP gross margin remained exceptionally strong at 97.9%, although it declined slightly from 98.2% a year earlier.

Non-GAAP research and development expenses increased 17% year over year to $547 million, while selling, general and administrative expenses rose 25% to $227 million.

Despite strong adjusted profitability, GAAP operating margin slipped to 13.9% from 14.4%. GAAP net income declined 45% year over year to $130 million, contrasting with 36% growth in non-GAAP net income to $566 million.

This divergence underscores the importance of evaluating underlying profitability alongside adjusted operating performance

                                                                                       Image Source: ARM

Cash Flow Weakness Warrants Caution

Arm's quarterly non-GAAP free cash flow declined approximately 73% year over year to $110 million from $411 million, while operating cash flow fell 63% to $207 million.

Nevertheless, trailing 12-month non-GAAP free cash flow increased 2% to approximately $1.1 billion. Cash and short-term investments totaled $3.62 billion, providing considerable financial flexibility.

The company's annualized contract value also increased 12% year over year to $1.79 billion, suggesting sustained customer commitments.

Although substantial liquidity supports product development and expansion, weaker quarterly cash generation deserves monitoring as Arm increases silicon-related investments.

How Do Qualcomm and AMD Compare With ARM?

Qualcomm Incorporated (QCOM Quick QuoteQCOM - Free Report) and Advanced Micro Devices, Inc. (AMD Quick QuoteAMD - Free Report) offer useful comparisons across Arm's expanding semiconductor markets. Qualcomm maintains substantial exposure to mobile processors, connectivity solutions and edge AI, making smartphone demand and premium-device adoption important operating drivers. AMD competes more directly in data center computing, where demand for energy-efficient processors continues to accelerate.

Qualcomm benefits from an established licensing business alongside its semiconductor operations, whereas AMD is positioned to capture growing AI infrastructure and server processor demand. Arm's expanding intellectual property ecosystem differentiates its business model from both companies. However, Qualcomm faces comparable mobile-market uncertainties, while AMD represents an important competitive benchmark as ARM moves further into commercially supplied server CPUs.

ARM Stock Deserves a Hold Despite Encouraging Earnings

Arm Holdings' earnings performance reinforces its position as an important beneficiary of expanding AI infrastructure investments. Strong licensing demand, growing data center adoption and improving operating profitability support its long-term prospects. The emerging silicon business could provide another meaningful growth opportunity as customer commitments translate into commercial shipments. However, royalty growth remains uneven, cash generation has weakened, and the shift toward processor sales introduces margin and execution risks. These considerations limit the case for aggressively increasing exposure following the recent share price appreciation. Investors already holding ARM should maintain their positions while monitoring silicon execution, royalty momentum and profitability. ARM remains a Hold.

ARM currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.