1 Key Metric To Watch That Could Send Arm Stock Soaring

Arm Holdings (NASDAQ: ARM) reported fiscal first-quarter earnings on Wednesday, and the results were solid.

Revenue jumped 22% to $1.29 billion, ahead of the consensus at $1.27 billion, driven by balanced growth in license and royalty revenue. On the bottom line, adjusted earnings per share improved from $0.35 to $0.45, ahead of the consensus at $0.40.

Arm continued to see strong growth in the data center segment, where royalty revenue more than doubled year-over-year. Arm-based chips have also surpassed the x86 platform used by Intel and AMD, and Arm's lead is expected to accelerate as the data center segment grows. The company has forged close relationships with major hyperscalers such as Alphabet, Microsoft, and Amazon, as well as Nvidia, all of which license its CPU technology. Arm is known for its power-efficient CPUs, which give it an advantage in the data center, which consumes massive amounts of energy.

However, Arm's earnings announcement was relatively quiet compared to its Arm Everywhere event earlier this year, when the company unveiled the Arm AGI CPU, marking the first time it is entering production silicon. The chip will start shipping in the fourth quarter of this fiscal year, which ends next March.

The stock soared on the news, and Arm's future success will largely be determined by the performance of that chip, which has already been oversubscribed. Initial demand is more than double what the company expected.

In addition to the chip, the big news to come out of the event was its fiscal 2031 forecast of $25 billion in total revenue, $15 billion in AGI CPU revenue, and $9 in adjusted earnings per share.

Image source: Getty Images.

The key metric to watch

Forecasting revenue five years from now for a product that's not on the market yet isn't easy, and Arm has provided a conservative projection to ensure it can hit that number. In order to create that forecast, Arm estimated a CPU data center total addressable market (TAM) of at least $100 billion by that year, meaning the company expects to earn approximately 15% of the market with the AGI CPU chip. Arm's major competitors in CPUs are Intel and AMD, which also make CPUs for PCs, data centers, and a range of other products.

Since Arm gave that forecast, other estimates of the CPU market have risen. In the last week, AMD said it now sees a $220 billion market for server CPUs, reflecting the massive growth in CPU demand from Agentic AI.

Using the same market-share math above, if Arm can capture 15% of a $220 billion market, it would generate $33 billion in revenue from the AGI CPU. It's far too early for the company to make any adjustments to that forecast, as it hasn't even shipped the first chip yet, but it's worth paying attention to the TAM forecast, as the higher it goes, the more bullish it is for Arm.

Is Arm a buy?

Arm's stock is expensive by conventional metrics, but the company's unique business model makes it hard to compare directly with its semiconductor peers. Investors will have to be patient as the silicon business develops, but over the next few years, Arm has the potential to be a powerhouse in the chip sector, thanks to its battery-efficient technology. That AGI CPU could pave the way for more in-house chips.

In an interview with The Motley Fool, Arm CFO Jason Child left the door open to future chips, saying, "There's no reason we couldn't have similar silicon offerings in mobile, IoT, or in edge devices." He also named PCs, robotics, automobiles, and physical AI as potential chips.

Arm launched the AGI CPU because its customers were demanding it, and if it's successful, which the early signs indicate it will be, it seems only natural that the company would launch more chips.

It will take a while for that story to develop, but if it plays out, the stock could have huge upside potential even from its current valuation.

Jeremy Bowman has positions in Advanced Micro Devices, Amazon, Arm Holdings, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Arm Holdings, Intel, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.