Could This AI Stock Become the Next Trillion-Dollar Chip Giant?

ARM +0.89%

A new wave of artificial intelligence (AI)-driven demand is reshaping the semiconductor space. With record revenue, soaring data center adoption, and the world’s biggest tech companies adopting its architecture, this chip designer is now looking like a contender for the trillion-dollar club in the coming decade.

Arm Delivers Record Q2 as AI Demand Surges Across Every Market

Valued at $139.6 billion, Arm Holdings (ARM) designs the chip architectures that power most of the world’s smartphones, AI devices, and, increasingly, data centers. However, it doesn’t manufacture chips itself. Arm makes money primarily through licensing fees (for using its chip designs) and royalties (a tiny price on each chip sold that uses its technology).

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Arm delivered its strongest second quarter ever, powered by surging global demand for AI compute from ultra-low-power edge devices to the world’s largest hyperscale data centers. In the second quarter of fiscal 2026, revenue climbed 34% year on year to $1.14 billion, the company's third straight billion-dollar quarter. Royalty sales reached an all-time high of $620 million, up 21% on strong performance in smartphones, data centers, automobiles, and IoT. Arm's licensing annualized contract value (ACV) increased by 28%, maintaining the momentum established in Q1.

Demand for data center compute remains a key catalyst. The Neoverse data center platform continues to scale rapidly, surpassing 1 billion CPUs deployed. Companies including Nvidia (NVDA) (Grace), Amazon’s (AMZN) AWS (Graviton), Google (GOOG) (GOOGL) (Axion), and Microsoft (MSFT) (Cobalt) are building custom silicon on Arm, fueling further royalty expansion. Licensing revenue also surged 56% to $515 million, reflecting strong interest in next-generation AI architectures and deeper strategic partnerships. Adjusted EPS also rose 30% to $0.39 per share.

During the quarter, Arm announced a significant strategic alliance with Meta (META) to improve AI efficiency at all levels of compute, from wearables to data centers, by combining Arm's energy-efficient designs with Meta's AI infrastructure. Arm also expanded its relationship with Samsung (SMSN.L.EB), which uses Arm's compute subsystem (CSS) in its Exynos chipsets to increase AI performance by up to 40%. The four main Android vendors currently offer CSS-enabled devices. The quarter saw the release of Lumex CSS, ARM's most advanced mobile compute platform. Lumex delivers on-device AI capabilities, including real-time translation, image improvement, and next-generation personal assistants. Partners such as OPPO and Vivo are preparing to launch flagship products later this year.

Furthermore, Nvidia DGX Spark, an Arm-based desktop supercomputer, has begun shipping to AI developers. Tesla's (TSLA) next-generation AI5 chip, based on Arm, achieves 40x quicker AI performance, allowing for more advanced autonomous capabilities. Arm today has a software ecosystem of over 22 million developers, which accounts for more than 80% of the global developer base. Arm continues to accelerate R&D investment to meet client demands, with significant investments in next-generation architectures, CSS, and potential chiplet or full SoC growth. For the third quarter, the company estimates $1.22 billion in revenue (plus or minus $50 million), with adjusted EPS of $0.41 (plus or minus $0.04). CFO Jason Child emphasized that rising revenue enables Arm to actively reinvest in R&D while also increasing earnings. Growing customer demand across cloud, edge, and devices supports Arm's long-term vision of enabling AI everywhere.

Why ARM Deserves a Spot in Your Portfolio

The expanding collaboration pipeline with Meta, Google Axion, Tesla AI5, Nvidia Grace, and Samsung Exynos signals that the world's largest and fastest-growing technology companies are focusing their future AI computing strategy on Arm. This offers a high-visibility, multi-year income runway based on both licensing growth and rising royalty rates. For long-term investors, ARM stock offers a rare combination of rapid revenue growth, expanding margins, high recurring royalty leverage, and a massive AI-driven TAM expansion. Currently, ARM stock trades at a premium of 58x forward 2027 earnings, which are estimated to increase by 32%. While this premium valuation reflects investors' optimism for the stock, risk-averse investors might be wise to wait for a more attractive entry point.

What Does Wall Street Say About ARM Stock?

On Wall Street, ARM stock holds an overall rating of “Moderate Buy.” Among the 30 analysts covering the stock, 19 rate it as a “Strong Buy,” and 11 recommend a “Hold.” The stock’s average target price of $174.24 suggests a potential upside of 29% from current levels, while the highest price estimate of $215 indicates a possible 59% rally over the next 12 months.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com