Ever heard of the $140 billion company, ARM Holdings (NASDAQ:ARM)? It's no Nvidia or Apple, but controls the core architecture - the blueprint - for 100% of chips designed by Apple and the custom CPUs in Nvidia's flagship AI super chips.
Here's the 4 line math, why this company is the poster child of the AI valuation bubble:
The requirement to improve GAAP net margins to roughly 40% is a major hurdle, given the company was tracking margins of around 16% for FY'25 and 19% over the past twelve months.
ARM is a people-intensive engineering firm that must compete with giants. Its R&D expense is a staggering 52% of revenue, versus Nvidia's 9%. The high cost of talent is primarily paid via Stock-Based Compensation (SBC). To hit 40% GAAP margin, ARM would have to eliminate this SBC expense, which would cause an immediate talent exodus.
That said, expecting revenue to triple doesn't make sense either. Since smartphone and PC/Laptop growth is capped - Apple pays a flat fee & rising royalties would require 30%+ of users buying Pro versions - the entire revenue growth burden falls on the Data Center.
The low-royalty AWS model dominates. Investors are pricing the entire segment at the high 10% rate - which is unreasonable. Companies like Amazon and Nvidia aren't using it. Microsoft is, but they just wanted to get competitive fast, being late to the party. Long-term this doesn't hold up.
And that's not all. There is, in fact, an entirely different alternative to ARM.
RISC-V Alternative: A Competitive Threat
The long-term risk to ARM's pricing power is the maturation of open alternatives.
The open-source, royalty-free architecture RISC-V is the industry's ultimate escape hatch. RISC-V offers extreme customization for AI/specialized workloads and is royalty-free—a vital financial advantage over ARM's mandatory fees.
Google, Meta, and Qualcomm are heavily invested in RISC-V, actively working to remove the need for ARM's architecture license.
How Might ARM Valuation Turn Out Fine?
Could ARM revenues 4x and margins 2x over the next 3 to 5 years? Difficult, but not impossible.
For that to happen, the company would need the following specific market actions and product adoption:
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