Goldman Sachs Maintains ARM Sell Rating: AI CPU Demand Doubles Cannot Conceal Weakness in Licensing

Overview

Goldman Sachs published an earnings commentary report on ARM Holdings maintaining its 'sell' rating. Although ARM slightly exceeded expectations in revenue and EPS this quarter, and management substantially increased AGI CPU product demand outlook, the core high-value royalty business fell short, reflecting temporary pressures in the smartphone market. Given ARM's unclear competitive advantages in chip manufacturing and relatively high valuation compared to peers, the firm expects stock prices to fluctuate within current ranges.

Core views

The central views revolve around supply-demand mismatches and differentiated business structures. On one hand, ARM shows strong momentum in emerging AGI CPU domains, with FY27-28 demand expectations revised from $1B to $2B driven by leading clients like Meta and extreme market shortages. However, supply constraints limit short-term revenue realization. Conversely, ARM's high-value royalty business performs poorly; this quarter's revenue of $671M falls short of the $700M market expectation primarily dragged down by sluggish smartphone demand. Meanwhile, the licensing segment shines with $819M revenue far exceeding expectations, projected for a 20% YoY growth in FY27. In terms of valuation and competition, Goldman Sachs notes that ARM lacks distinct competitive advantages in chip manufacturing relative to peers, with current valuation levels (50x normalized EPS) being elevated. Despite raising the target price to $150 based on $3.00 normalized EPS, it still implies approximately a 37% downside space compared to the current $237.30 share price. Without clearer evidence of accelerating royalty growth or definitive progress toward scalable chip manufacturing, a shift towards a more positive stance seems unlikely.

Analysis framework

Goldman Sachs adopted a combined approach of segment-by-segment analysis and relative valuation. First, they decomposed ARM's revenues into licensing fees, royalty usage fees, and emerging CPU businesses to separately evaluate their growth drivers and risks. Second, industry cycle analysis was used to highlight how the cyclical downturn in the smartphone market suppresses royalty income, while data center/AI drives CPU business expansion. Finally, relative valuation via P/E multiples (using 50x as an anchor) compared to historical and peer benchmarks concluded that ARM is overvalued. This analytical framework emphasizes asymmetric impacts of different business segments on overall performance and the constraining effect of supply bottlenecks on demand fulfillment.

Methodology notes

• Valuation MethodPE/PEG valuation

  Using a 50x P/E multiple applied to normalized EPS ($3.00) to calculate the target price

  This method smooths out short-term fluctuations aiming to reflect long-term profitability and growth potential—a common practice for tech stocks.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  CPU market shortage driving demand surge

  The report highlights severe supply shortages causing demand to vastly exceed supply. While this imbalance boosts demand forecasts, supply constraints hinder immediate revenue recognition, underscoring production bottlenecks limiting performance.

• Corporate Fundamentals & Financial FrameworkProfit Quality Analysis

  Distinguishing between sustainable royalty income and volatile licensing income

  Royalty is viewed as core, high-quality income whose shortfall carries greater negative implications than licensing surges, revealing actual terminal market health (e.g., phones).

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• ARM Holdings (ARM.US)

  Direct coverage with benefits from AI CPU demand growth but constrained by mobile market weakness and high valuation

  Strengths

  Strong AGI CPU product traction, robust licensing segment growth, and solid datacenter demand

  Weaknesses

  Underwhelming core royalty revenue, absence of chip manufacturing competitive edge, and inflated valuation

  Comparison

  Compared to peers, ARM lacks vertical integration advantages in manufacturing, with valuation multiples notably higher than traditional semiconductor firms

  Risks

  Slower-than-expected smartphone market recovery, persistent supply constraints, and intensifying competition

• Meta Platforms (META.US)

  A key early client for ARM's AGI CPUs, indirectly benefiting from the partnership

  Strengths

  As a primary driver behind ARM CPU demand growth through strategic collaboration

  Weaknesses

  N/A

  Comparison

  N/A

  Risks

  N/A

Key data

• Quarterly Total Revenue$1.49 billionSlightly above GS’s estimate of $1.47 billion and consensus expectations
• Royalty Income$671 millionBelow GS’s estimate of $688 million and consensus $700 million, pressured by mobile market dynamics
• Licensing Segment Revenue$819 millionSignificantly ahead of GS estimates at $783 million and consensus $775 million
• AGI CPU Demand Expectation (FY27-28)$2 billionUpgraded from prior $1 billion reflecting stronger product traction
• Target Price$150Raised from $125 based on 50x P/E and expected $3.00 EPS
• Current Share Price$237.30Closing price as of May 6, 2026

Impact & implications

For ARM, near-term stock pressure stems from underperforming royalty segments and premium valuations despite attractive long-term AI CPU narratives. Within the industry, CPU shortages indicate continued acceleration in AI infrastructure investment but also highlight supply chain bottlenecks as constraint factors. Smartphone recovery pace directly determines stability of ARM’s core cash flows. Investors should monitor if ARM can resolve supply issues to capitalize on demand and whether data center growth offsets mobile sector declines.

Risks

• Slower-than-expected ramp-up of data center business
• Unmet operating leverage effects
• Insufficient execution capacity in chip manufacturing
• Persistent softness in smartphone demand
• Supply chain constraints delaying revenue recognition

What to watch

• Accelerating signs in royalty revenue growth
• Visibility into scalable chip manufacturing advancements
• Progress in resolving AGI CPU supply chain bottlenecks
• Data center business effectively offsetting mobile sector declines