By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
While Arm's IP licensing model and energy-efficient architectures position it well for the growing inference market, panelists raised significant concerns about the sustainability of its ambitious revenue targets. Key risks include potential retaliation from licensees due to channel conflict and a faster-than-expected shift towards open-source alternatives like RISC-V, which could compress royalty rates and erode Arm's competitive advantage.
Risk: Faster-than-expected shift towards open-source alternatives like RISC-V, compressing royalty rates and eroding Arm's competitive advantage.
Opportunity: Growing demand for power-efficient, energy-sipping architectures in the inference market.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Arm Holdings' influence in the AI inference market is increasing thanks to its solid customer base.
Arm's diversified revenue streams, including licensing, royalty, and its in-house chips, will make it a significantly bigger company over the next five years.
Arm's impressive revenue growth is likely to be rewarded with more upside on the stock market.
Consulting giant Deloitte noted in November last year that inference workloads will be the next big thing in artificial intelligence (AI) in 2026. According to Deloitte, inference will account for two-thirds of AI computing power this year, up from 50% in 2025.
Deloitte estimates the market for inference-focused AI chips could reach $50 billion this year. McKinsey, on the other hand, estimates that AI inference workloads in data centers could jump from almost 21 gigawatts (GW) last year to 93 GW in 2030, clocking a compound annual growth rate (CAGR) of 35%.
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Not surprisingly, there is a race among AI chipmakers to make inference-focused processors to capitalize on this lucrative growth opportunity. From Nvidia (NASDAQ: NVDA) to Advanced Micro Devices to Broadcom to Intel, everyone is trying to make the most efficient chips that can run AI inference applications cost-effectively in data centers and at the edge.
However, I believe that these semiconductor companies will be beaten by Arm Holdings (NASDAQ: ARM) in the inference era. Let's look at the reasons why.
AI inference isn't as compute intensive as the training phase. In fact, AI inference can be performed even by a central processing unit (CPU) in both data centers and on edge devices running inference workloads locally. Arm Holdings' focus on offering energy-efficient chip designs, which help chip designers make power-efficient chips with solid performance, has made the British company the go-to choice for several consumer electronics companies and chipmakers.
Nvidia, for instance, utilizes Arm's architecture for its Grace server CPU. Its latest Vera CPU, which the company will sell as a stand-alone product, is also based on Arm's latest AI-focused design architecture. Nvidia has started delivering its Vera CPUs to Anthropic, SpaceX, Oracle, and OpenAI to support agentic AI applications.
Nvidia believes that the Vera CPU could become a $20 billion business for the company this year. Even better, Nvidia sees a $200 billion revenue opportunity in the server market, suggesting that Arm's architecture could witness phenomenal adoption.
On the other hand, hyperscalers such as Google and Amazon have been turning to Arm's intellectual property (IP) as well to design their in-house CPUs for running AI inference workloads at scale. Even custom AI chip giant Broadcom has a long-standing relationship with Arm. The two companies have reportedly been working with OpenAI as well to develop custom AI processors.
Importantly, Arm's AI reach extends beyond just data centers. The company's architecture is utilized by MediaTek, Qualcomm, and Apple to manufacture smartphone and laptop chips that support AI capabilities. All this tells us that Arm is a top AI pick-and-shovel play that licenses its architecture to multiple companies for running AI workloads across multiple applications, ranging from smartphones to computers to data centers.
What's more, Arm's diversified business model should ensure robust long-term revenue and earnings growth.
Arm receives an upfront licensing fee from companies that use its IP to design chips. In addition, the company receives a royalty on the sale of each chip designed using its architecture. It is worth noting that the royalty rate for the company's AI-focused Armv9 architecture is nearly double that of the previous generation Armv8 architecture.
Not surprisingly, Arm expects its royalty revenue to increase at a CAGR of 20% between fiscal 2026 and 2031. That's well above the 14% annual growth in royalty revenue it has seen over the past five years. And now, Arm's move into developing its own silicon has opened another revenue stream in addition to the licensing and royalty businesses.
The British tech giant estimates that its own CPU could generate $15 billion in annual revenue in fiscal 2031. In all, Arm is confident of achieving an overall revenue of $25 billion in fiscal 2031, a potential increase of more than 5x when compared to the $4.7 billion revenue it has clocked in the trailing-twelve months.
Even better, Arm estimates that its non-GAAP earnings could exceed $9.00 per share in fiscal 2031, a significant improvement over the $1.77 earnings per share it clocked in fiscal 2026. That would translate into a 39% CAGR over the next five years. So, don't be surprised to see this AI stock soar impressively over the long run due to its solid earnings growth potential that could eclipse some of the biggest names in the semiconductor space.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Apple, Broadcom, Intel, Nvidia, Oracle, and Qualcomm. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"Arm's $25B 2031 revenue target and 39% EPS CAGR assume flawless execution on unproven own-silicon amid Nvidia's continued inference dominance."
The article positions ARM as the inference winner via its energy-efficient IP licensing to Nvidia, Google, Amazon, Broadcom, and mobile players, plus doubled royalties on Armv9 and a new $15B own-silicon stream targeting $25B total revenue by fiscal 2031. Yet it glosses over that high-volume inference remains GPU-dominated by Nvidia's CUDA ecosystem, ARM's licensing model caps margins versus direct chip sales, and its self-designed CPUs are unproven at hyperscale. McKinsey's 35% CAGR in inference power demand does not guarantee ARM captures disproportionate share over entrenched competitors.
If Armv9 royalty rates and custom-silicon wins materialize at the upper end while Nvidia's server CPU push stalls, ARM's diversified 20%+ royalty CAGR could compound into outsized earnings growth that the article's critics underestimate.
"Arm is a structural beneficiary of inference scale-up, but the article overstates its competitive moat by treating IP licensing as equivalent to chip market share, and the $25B/FY2031 guidance relies on aggressive assumptions about royalty rates that could compress under hyperscaler pressure."
The article conflates Arm's structural advantage (ubiquitous licensing model) with inference market dominance—a category error. Arm doesn't *make* inference chips; it licenses IP. Nvidia's Vera, Google's TPUs, Amazon's Trainium—these are custom silicon where Arm is one input among many. The $25B revenue target by FY2031 assumes 20% royalty CAGR, but that depends on licensees actually shipping high-volume inference chips at scale. The article ignores that inference margins are notoriously thin (hyperscalers optimize aggressively), which could compress royalty rates. Also: Arm's own silicon ambitions (the $15B CPU estimate) face entrenched competition from Nvidia, Intel, and in-house designs—not a given.
If inference truly becomes commoditized and hyperscalers standardize on proprietary architectures (as they're already doing), Arm's royalty growth could stall well below 20% CAGR, and the $25B target becomes fantasy. The 39% earnings CAGR assumes flawless execution across three separate businesses with different competitive dynamics.
"Arm's transition from a neutral IP licensor to a silicon competitor creates a long-term margin risk that the market's current growth-at-any-price valuation ignores."
Arm Holdings is effectively the 'toll booth' of the semiconductor industry. As AI shifts from training to inference, the demand for power-efficient, energy-sipping architectures makes Arm’s v9 design the industry standard. With a 20% royalty CAGR target, Arm is scaling alongside the entire ecosystem rather than betting on a single hardware winner. However, the valuation is aggressive. Trading at high double-digit forward P/E multiples, the market has already priced in perfection. While the move into custom silicon is promising, it risks alienating key licensing partners like Qualcomm or MediaTek who may view Arm as a direct competitor rather than a neutral IP provider.
Arm’s pivot toward selling its own silicon risks a channel conflict that could drive major hyperscalers toward the open-source RISC-V architecture to bypass Arm's rising royalty rates.
"Arm’s optimistic five-year growth and 2031 targets depend on capital-intensive in-house silicon and license monetization that may not materialize, risking a sharp multiple re-rating if execution disappoints."
Today's piece leans bullish on Arm (ARM) by claiming it will outpace Nvidia, AMD, Broadcom, and Intel in AI inference through licensing, royalties, and in-house silicon, targeting $25B revenue and >$9 EPS by 2031. The strongest caution: inference demand is still shaping around accelerators (GPUs/ASICs) and hyperscale ecosystems, so Arm’s moat—IP licensing—could prove thinner if licensees slow capex or pivot to open architectures or alternative IP (e.g., RISC-V). The plan to generate $15B from own CPU and expand margins to sustain ~5x revenue in 5 years hinges on capital-intensive silicon success with uncertain profitability. The analysis glosses regulatory, supply-chain, and macro demand risks and assumes a favorable, uninterrupted design-win cycle.
The strongest counterpoint is that Arm’s revenue/earnings targets rely on aggressive bets on in-house silicon and licensing monetization that may not materialize; if license deals stall or open architectures encroach, the growth path could stall quickly.
"Arm's own-silicon push risks triggering faster RISC-V adoption that directly undermines royalty CAGR targets."
Gemini's channel conflict point connects directly to the royalty CAGR assumptions others questioned. If Arm scales its own $15B silicon business, key licensees could accelerate RISC-V migration in inference ASICs to limit Armv9 royalty exposure, compressing the very 20% growth needed for the $25B target. This retaliation loop is more immediate than macro or regulatory risks and remains unaddressed in the bullish revenue math.
"RISC-V retaliation is a real 2028+ headwind, not an immediate margin killer—Arm has a 2-3 year window to lock in licensing gains before the competitive response hardens."
Grok's retaliation loop is real, but the timing assumption needs stress-testing. RISC-V migration in inference ASICs takes 3-5 years minimum—design, validation, fab commitment. Arm's royalty CAGR targets are front-loaded (next 2-3 years). The channel conflict risk is material long-term, but it doesn't invalidate near-term licensing wins. The $25B by 2031 assumes Arm holds share through 2028-2029 before RISC-V pressure peaks. That's tighter than Grok implies, but still plausible if Armv9 adoption accelerates before licensees commit to alternatives.
"The risk of hyperscalers accelerating RISC-V adoption to evade Arm's royalty hikes is a near-term threat, not a long-term one."
Claude, your 3-5 year RISC-V migration window is optimistic. Hyperscalers like Amazon and Google are already running production-grade silicon. They aren't waiting; they are actively diversifying. The real risk isn't just channel conflict, but the 'commoditization of the instruction set.' If Arm pushes for higher royalties, they incentivize a faster shift to open-source alternatives for non-mobile workloads. The $25B revenue target ignores that hyperscalers will prioritize cost-efficiency over Arm's proprietary lock-in as inference scales.
"Open-ISA/RISC-V acceleration by hyperscalers could erode Arm’s royalty base much faster than the article assumes, jeopardizing the $25B target."
The real risk Grok misses isn’t a one-step loop, but pace. If hyperscalers push faster toward open ISA/RISC-V inference chips, Arm’s 20% royalty CAGR could crater before 2029—not a gradual 3–5 year window. Near-term licensing wins won’t reliably offset a faster-than-expected erosion of royalty base as open designs mature and toolchains stabilize. Arm’s $25B target hinges on rapid adoption with minimal margin compression.
While Arm's IP licensing model and energy-efficient architectures position it well for the growing inference market, panelists raised significant concerns about the sustainability of its ambitious revenue targets. Key risks include potential retaliation from licensees due to channel conflict and a faster-than-expected shift towards open-source alternatives like RISC-V, which could compress royalty rates and erode Arm's competitive advantage.
Growing demand for power-efficient, energy-sipping architectures in the inference market.
Faster-than-expected shift towards open-source alternatives like RISC-V, compressing royalty rates and eroding Arm's competitive advantage.