Arm's AI Revenue Boost Tempered by Emerging Memory Shortage Risk

What happened

Arm's stock recently rose on reports of accelerating AI revenue, reflecting strong demand for its Neoverse data-center architectures and CSS licenses. However, a new article highlights that memory shortages could crimp Arm's growth next year, introducing a fresh supply-chain vulnerability. This risk compounds existing headwinds detailed in the DeepValue report, including a sky-high valuation of 143x P/E and heavy reliance on mature smartphone royalties and China. Arm's growth trajectory is already precarious, with royalty growth needing to sustain above 15% YoY to justify its premium multiple amid competition and SoftBank's stake overhang. The memory shortage threat underscores the fragility of Arm's AI momentum, as external factors could easily derail the growth assumptions baked into the stock price.

Implication

The memory shortage risk adds a tangible near-term threat to Arm's growth story, which is already priced for perfection with a P/E of 143x. If shortages materialize, they could slow chip production and reduce royalty streams, potentially pushing growth below the critical 15% YoY threshold that triggers downside scenarios. This could accelerate multiple compression, leading to stock price declines independent of Arm's strong AI positioning. Investors must now factor in supply-chain volatility alongside existing risks like China exposure and RISC-V competition, making the stock less attractive at current levels. Prudent action might involve trimming positions or waiting for a more compelling entry point, such as the $85 level highlighted in the master report, to account for heightened uncertainty.

Thesis delta

The news of potential memory shortages does not fundamentally alter the 'POTENTIAL SELL' thesis but reinforces downside risks by adding supply-chain vulnerability to existing concerns over royalty growth sustainability. It highlights how external shocks could push growth below critical thresholds, increasing the likelihood of multiple compression from already elevated levels. Thus, the investment call remains unchanged, but with heightened emphasis on monitoring near-term growth indicators and supply-chain developments.