Arm’s Dance with the Algorithm

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Arm Holdings (ARM +2.30%). The very name suggests a protective casing, a bulwark against the inevitable chaos. And chaos, naturally, is what we have. The company, purveyor of designs for these minuscule, yet tyrannical, silicon minds, has seen a temporary reprieve in its fortunes, buoyed by the insatiable appetite of the artificial intelligences. A surge in revenue, they proclaim. As if the market were a benevolent deity, rewarding innovation. It’s merely a postponement of the reckoning, I assure you.

The Data Center and the Phantom Menace

The shares rallied, they say. A brief spasm of optimism following the announcement of results. Investors, ever the fickle creatures, have focused on the “AI opportunities” rather than the looming shadow of the smartphone market. A predictable distraction. Arm envisions its data center business becoming its largest segment, achieving a 50% market share amongst the hyperscalers. A lofty ambition. It seems they believe that by feeding the machines, they will be spared. The central processing units, they claim, are becoming more important. As if the machines weren’t already in charge. One wonders if they’ve considered the machines will simply design better processors themselves, rendering Arm obsolete. A thought, perhaps, best left unsaid in polite company.

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However, a tremor in the foundations. Increasing memory supply constraints. A polite way of saying they can’t get enough parts. A potential 15% reduction in smartphone volumes. A mere inconvenience, they insist. Even a 20% reduction would only equate to a 2-4% effect on royalties. A comforting statistic, if one ignores the underlying fragility of the entire system. This company, of course, trades at a “growth multiple.” A euphemism for “wildly overpriced,” but let us not dwell on unpleasant truths. It’s like building a palace on quicksand, but with a slightly more optimistic spreadsheet.

Overall, fiscal third-quarter revenue jumped 26% to $1.24 billion. License revenue rose 25% to $505 million, aided by a contribution of $200 million from Softbank. A benevolent benefactor, or merely a puppet master? The number of Arm Total Access licenses increased to 50. Over half of the top 30 customers now partake. A comforting conformity. They’ve also added six Flexible Access customers, bringing the total to 318. A growing flock, willingly submitting to the algorithm.

Royalty revenue rose 27% to $737 million, driven by adoption of newer technologies, including Armv9 and CSS. Five customers now ship devices with CSS chips, including the top four Android phone makers. A testament to their ingenuity, or merely a lack of viable alternatives? It’s a subtle distinction, easily lost in the quarterly reports. Annualized contract value soared 28% to $1.62 billion. Looking ahead, they project fourth-quarter revenue of $1.47 billion, representing 18% growth. Adjusted earnings per share will be between $0.54 and $0.62. Numbers. Meaningless, ultimately, in the face of entropy.

Is ARM Worth the Risk?

The licensing and royalty business model is, admittedly, attractive. High gross margins, recurring revenue. A steady drip of profit, extracted from the digital ether. And the company does have an opportunity to grow in the data center space. Meanwhile, the ties to Softbank provide a…stability. A precarious stability, perhaps, but stability nonetheless. One imagines Mr. Son, observing the proceedings with a detached amusement, like a sorcerer watching his creations come to life.

At a forward P/E ratio of 49 and a PEG ratio under 0.7, ARM appears “reasonably priced.” A laughable assertion. The likely weakness in the smartphone market isn’t necessarily factored into those estimates, and as such, I remain on the sidelines. A prudent position, I believe. One must always remember the words of the Master: “Cowardice is a virtue when facing the inevitable.” Let the others chase the phantom of growth. I shall observe, with a wry smile, as the whole edifice comes crashing down.

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2026-02-10 18:23