Arm Q1 FY2027 Earnings: Record Revenue and a Guidance Beat, but the Stock Sold Off

Arm posted outstanding numbers across the board. Total revenue grew 22% year over year to $1.289 billion ($1.27 billion expected), marking a record for the first quarter. Royalty revenue also grew 22% year over year to $715 million, which was also a record for the first quarter. The data center was the most impressive segment with year over year royalty revenue growth more than doubling. This was a direct result of the cloud and AI providers adopting Arm's Neoverse technology. 

Shipments of Neoverse have now amassed over 1.5 billion cores. Licensing revenue grew 23% to $574 million, while the annualized contract value (which measures the committed future revenue) grew by 13% to $1.732 billion. As Arm does not manufacture chips, their margins are higher, with a non-GAAP gross margin of 98.1%. Non-GAAP EPS grew 28% to $0.45, beating the $0.40 estimate, and Free Cash Flow was $665 million.

What could account for a drop in stock despite a strong quarter? It is likely due to price. Arm announced hits with yearly earnings up by over 120%. Still, the company lost another 30% in a month as investors began to doubt the fairness of the stock price. Even after the stock lost value, the stock was trading at more than 100 times earnings. In the chip sector, a stock trading at this valuation is anticipated to report positive earnings. Arm’s earnings are likely to draw criticism for any underperformance. 

Arm’s royalty growth was at 22% this quarter but is predicted to have single digit under-performance next quarter due to poor sales in smartphone devices. Additionally, Arm is expected to spend a considerable amount on new product development. This is expected to drive Arm’s non-GAAP operating expenses to about $780 million, causing Arm to barely break even. 

The day after Arm released earnings, the stock dropped 8%. One firm dropped their price target from $475 to $340. A week later, Arm along with other chip stocks began to rally strongly recovering most of the drop. This illustrates Arm’s price movements draw heavily from investor sentiment.

Arm's position on AI computing is the reason as to why investors buy up Arm. Arm's AGI CPU. launched in 2026, is exceeding all expectations. Arm stated in Q2 of 2026 that commitments had passed the $1 billion mark. They've now exceeded $2 billion. The initial batch of the AGI CPU has shipped to clients, and new contracts in both the U.S. and China have been announced. 

Arm has assured it has found contract manufacturers to meet the demand for the AGI CPU. This is a large deal, as it shows Arm is moving beyond the simple design leasing business Arm has been known for. Arm is starting to move into a more high-value, compute product business. Combined with the increasing demand for its new AI computing architecture, Armv9, and Arm Compute Subsystem, which also earn higher royalties, this is the main revenue driver of the business that justifies its premium valuation.

Arm’s outlook was slightly better than expected, which is part of why the longer-term case remains intact. For the second quarter of fiscal 2027, the company guided revenue to $1.38 billion, give or take $50 million, above the $1.34 billion analysts expected and about 22% higher than a year prior. 

ARM Price Chart - Source: Tradingview

They also guided to non-GAAP EPS of $0.47, above the current $0.43 consensus. Within that, management guided to mid-30% license revenue growth year over year, while royalty revenue growth was guided to the low-teens. While investors are weighing the trade-offs against the strong top-line growth, the more spending and slower royalty growth will most certainly weigh on investors’ minds.

Key Levels

• Resistance: $279.50, $282.88, $312.53, $334.47
• Support: $254.27, $248.08, $227.06, $201.27
• 50 EMA: $254.27 (recovered during the rebound)
• 100 EMA: $279.50 (Resistance band of stock testing)
• RSI: ~65, still high but cooling down from recent overbought territory

Arm beat all of the revenue and guidance expectations and analyst consensus, but still fell about 8% the day after the report. This isn’t a bad earnings report. Valuation was likely the reason for sell off, as Arm is one of the highest multiples stocks in the chip industry. 

A beat was already expected, but slower guided royalty growth and increased costs also encouraged a sell off. One week after the report, the stock recovered most of its loss due to a broad rally in the semiconductor industry.

The answer depends on the price you are willing to pay for future growth. The company has been rapidly growing in AI and data centers and the AGI CPU pipeline has more than doubled to exceeding $2 billion. However, if we were to make a mistake with the valuation, we wouldn’t be able to make it back easily, and royalty growth is expected to slow in the future. 

There is a big discrepancy in analyst price targets, from about 210 dollars to above 340, which is a pretty large range. The analysis in this post is not buy, sell, or hold advice.

By almost any metric, Arm's recent quarter was very strong. They had record-setting first-quarter revenue, data-center royalties more than doubled, AGI CPU demand more than doubled, and they provided optimistic guidance. The mixed trading action (an 8% decline, followed by a sharp reversal) was more on the price of the stock rather than the business.

It is currently trading at a valuation of over 100 times earnings, and without Arm continuing to advance their AI computing, the current valuation is justified with the slowing royalty growth. The stock is currently testing resistance in the 280 to 283 range. If the stock breaks above this resistance, it would strengthen the bull case, however, if it breaks below the 254 range, it would strengthen the bear case.