Can Arm Holdings Become a $1 Trillion Company?

Arm Holdings (NASDAQ: ARM) has more than doubled year to date and sits at a market cap above $300 billion. There's still a big gap between its current valuation and the $1 trillion milestone, but AI tailwinds could potentially push the stock to this benchmark within a few years.

A vast intellectual property (IP) portfolio tied directly to AI infrastructure and surging demand for central processing units (CPUs) has propelled the stock, and these catalysts could extend the rally.

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The IP portfolio provides high-margin recurring revenue

Almost all of Arm's revenue comes from its IP portfolio. The company designs key components for smartphones, laptops, AI data centers, 5G, and other high-demand applications. Artificial intelligence has been the major revenue driver recently.

Overall revenue reached $4.92 billion in its fiscal 2026, which was up by 23% year over year. It represented the company's third consecutive fiscal year of more than 20% revenue growth.

Arm makes royalties from various tech giants that are selling AI chips, including Nvidia (NASDAQ: NVDA). Companies will pay Arm for its intellectual property so they can produce high-demand products.

Arm's business model resembles a LEGO instruction booklet. Without that booklet, you can't build the LEGO displayed on the box. Since the instruction booklet covers products critical to AI infrastructure and consumer devices, Arm can charge a high premium to companies that want to use it legally.

CPU demand is heating up

Although Arm has made almost all of its revenue from licenses and royalties, the company recently said it would enter the hardware industry and create its own CPUs.

The company's vast intellectual property has established it as a leader in the industry. That will make it easier for Arm to penetrate the CPU industry with its own hardware. Arm made this announcement in March and already has more than $2 billion of customer demand across fiscal 2027 and fiscal 2028.

Arm expects data centers to become the largest part of its business. Licensing and royalty fees will continue to operate in the background, but CPUs are expected to be the major catalyst for future years.

In that case, Arm Holdings has a real shot at becoming a $1 trillion company within a few years. The demand for agentic AI certainly works in the company's favor, since AI agents need more CPUs. That has shifted the CPU-to-GPU ratio in favor of CPUs.

Currently, the CPU-to-GPU ratio is between 1:4 and 1:8, according to TrendForce. That means a data center usually has four to eight GPUs for each CPU. The future ratio is expected to shift closer to 1:1 or 1:2.

That means CPU demand can quickly quadruple. Arm is well-positioned to ride that momentum. If it does, and the stock follows suit, Arm would be worth more than $1 trillion before 2030. It's a tall order for a stock already priced at 60x trailing sales, but still a plausible growth story.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Arm Holdings and Nvidia. The Motley Fool has a disclosure policy.