Arm's Amazon-Driven Data Center Boost Masks Persistent Valuation and Execution Concerns

What happened

The Motley Fool article highlights Amazon's explosive demand for Arm-based Graviton chips and Arm's claim that data center royalty revenue doubled over the past year. This aligns with the bull case in the DeepValue report, where server CPU share expansion beyond 25% could drive higher-value royalty mix. However, the report critically notes that Arm's royalties remain 46% anchored in mobile application processors, facing a forecasted 2026 handset shipment decline of -2.1% YoY. Moreover, the stock's stretched valuation—P/E 166x and EV/EBITDA 145x—leaves no margin of safety and hinges on flawless execution in licensing and CSS adoption. Investors must look beyond the promotional spin to assess whether data center gains can sustainably offset structural risks like mobile dependence and licensing volatility.

Implication

Short-term, this news may boost sentiment, but Arm's stock remains highly sensitive to quarterly licensing optics and guidance delivery. For sustained upside, data center royalties must grow into a larger mix while Annual Contract Value (ACV) stays above +20% YoY and Remaining Performance Obligations (RPO) stabilize from recent declines. The bear risk persists if handset weakness erodes royalty growth or if PRC/export controls constrain high-performance core monetization. Given the DeepValue report's 'WAIT' rating, investors should prioritize monitoring Q4 FY26 results against the $1.470B ± $50M revenue guide and ACV/RPO trends. Attractive entry points remain below $110, as the current valuation offers limited error tolerance amid ongoing execution uncertainties.

Thesis delta

The news confirms data center momentum, supporting Arm's bull scenario but does not shift the core thesis. The DeepValue report's 'WAIT' call remains unchanged because fundamental risks—mobile royalty dependence, licensing lumpiness, and elevated valuation—are unaddressed. Investors should await concrete financial evidence, such as ACV stability and royalty resilience, before reconsidering the investment stance.