For 35 years, ARM never made a chip. This week, they changed that.
ARM is one of those companies most people have never heard of, but almost everyone uses. The British firm designs the blueprints behind the processors in virtually every smartphone on earth - iPhones, Samsungs, Pixels, all of them. But ARM doesn’t build anything. It licenses its designs to companies like Apple, Qualcomm, and NVIDIA, then collects a royalty every time a chip ships. It’s a toll booth on the entire mobile industry, generating $4 billion in revenue last year with fat margins and almost no manufacturing costs.
Now ARM is making a big bet. On Tuesday, it unveiled the AGI CPU - its first-ever physical chip, built for AI data centers. Meta signed on as the first customer, with OpenAI, Cloudflare, and SAP also committed. ARM says the chip could generate $15 billion in revenue by 2031. The stock jumped 16% in a day.
It’s a bold move, but it’s also risky. ARM is now competing directly with some of the same companies it licenses to. The stock has tripled since its 2023 IPO and trades at a P/E over 200 - one of the most expensive in the entire market. Believers say ARM is becoming the backbone of AI. Skeptics say the valuation already assumes that future has arrived.
Here's how the community voted
The AI data center play is massive - ARM’s designs already power servers from Amazon, Google, and Microsoft. The AGI CPU goes further, delivering 2x the performance per rack versus x86 chips while using less power - critical as data centers hit energy limits. Eight customers including Meta and OpenAI are already committed.
The licensing model is a cash machine - ARM designs blueprints and collects royalties on every chip that ships, with no factories or supply chains to manage. Revenue grew 24% last year to $4 billion, licensing revenue jumped 56% last quarter, and the business scales with almost no extra cost. More AI means more chips, and ARM gets paid on nearly all of them.
They own mobile and they’re coming for everything else - ARM powers over 99% of smartphones and now holds roughly 25% of the cloud server market. Amazon, Google, and Microsoft all built their latest data center chips on ARM designs, and the company is expanding into automotive and edge computing.
The valuation is eye-watering - At a P/E of over 200, ARM is priced like every AI dream has already come true. The stock has tripled since its 2023 IPO at $51, and even a small earnings miss could trigger a sharp selloff at this valuation. There’s very little room for anything to go wrong.
Making chips means competing with your own customers - ARM’s biggest licensees include Apple, NVIDIA, Amazon, and Google. By launching its own chip, ARM is now selling directly against the companies that pay it royalties. If those partners feel threatened, they could accelerate investment in RISC-V, a free, open-source alternative that’s already hit 25% of the global processor market.
SoftBank’s grip adds hidden risk - SoftBank owns the majority of ARM and has taken out a $20 billion margin loan against its shares, with $8.5 billion currently drawn. If the stock drops far enough to trigger loan covenants, SoftBank could be forced to sell shares in a hurry, creating a downward spiral that has nothing to do with ARM’s business.
The AI data center play is massive - ARM’s designs already power servers from Amazon, Google, and Microsoft. The AGI CPU goes further, delivering 2x the performance per rack versus x86 chips while using less power - critical as data centers hit energy limits. Eight customers including Meta and OpenAI are already committed.
The licensing model is a cash machine - ARM designs blueprints and collects royalties on every chip that ships, with no factories or supply chains to manage. Revenue grew 24% last year to $4 billion, licensing revenue jumped 56% last quarter, and the business scales with almost no extra cost. More AI means more chips, and ARM gets paid on nearly all of them.
They own mobile and they’re coming for everything else - ARM powers over 99% of smartphones and now holds roughly 25% of the cloud server market. Amazon, Google, and Microsoft all built their latest data center chips on ARM designs, and the company is expanding into automotive and edge computing.
The valuation is eye-watering - At a P/E of over 200, ARM is priced like every AI dream has already come true. The stock has tripled since its 2023 IPO at $51, and even a small earnings miss could trigger a sharp selloff at this valuation. There’s very little room for anything to go wrong.
Making chips means competing with your own customers - ARM’s biggest licensees include Apple, NVIDIA, Amazon, and Google. By launching its own chip, ARM is now selling directly against the companies that pay it royalties. If those partners feel threatened, they could accelerate investment in RISC-V, a free, open-source alternative that’s already hit 25% of the global processor market.
SoftBank’s grip adds hidden risk - SoftBank owns the majority of ARM and has taken out a $20 billion margin loan against its shares, with $8.5 billion currently drawn. If the stock drops far enough to trigger loan covenants, SoftBank could be forced to sell shares in a hurry, creating a downward spiral that has nothing to do with ARM’s business.
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Fundamentally, a solid company but absolutely nothing to gain at this valuation IMHO. $4b rev for $150b. Crazy numbers.