Demand for artificial intelligence (AI) compute has shifted significantly in 2026. While hyperscalers had focused the majority of their spending on graphics processing units (GPUs) and custom AI accelerator chips over the last three years, they’re now adding tons of central processing units (CPUs), and a handful of companies are seeing the benefits.
Arm Holdings (ARM +5.47%) has been one of the biggest beneficiaries so far. While it’s long held a dominant position in mobile device CPUs, it’s made significant progress in data center CPUs over the past few years. That’s a market historically dominated by Intel and (to a lesser extent) AMD. But energy-efficient Arm-based designs could become an extremely valuable resource for power-hungry AI data centers, potentially accelerating Arm’s revenue growth going forward.
The market has taken notice of Arm’s momentum in the area, and the stock has tripled in value since the start of the year. Investors may be wondering if they missed a big opportunity or if the semiconductor stock can triple again from here.
Image source: The Motley Fool.
Can Arm dominate demand for data center CPUs?
At Arm’s investor day back in March, it estimated the total addressable market for data center CPUs will reach $100 billion by 2031, up from $50 billion in 2026. That may be conservative. During its most recent earnings call, AMD updated its server CPU market estimate to $120 billion by 2030.
Driving the growth in CPU demand is agentic AI. CPUs are great at orchestrating a server of GPUs, determining where data should move, and handling machine-to-machine communication needs. If a GPU is specialized labor, a CPU is the manager. As agentic workloads grow, CPU demand increases. Intel CEO Lip-Bu Tan suggested that the ratio of CPUs to GPUs could move from 1:4 currently to 1:1 in the future as more work migrates to AI agents and they handle more complex tasks.
Importantly, all indications are that Arm is seeing tremendous market share improvements in the data center space. Management said Arm’s market share of CPU compute among the top hyperscalers is about 50% in its fourth-quarter letter to shareholders. That’s backed up by statements from Nvidia and Amazon, which use Arm architecture for their CPUs.
Nvidia said it has visibility to nearly $20 billion in total CPU revenue this year during its most recent earnings call. Amazon says its Graviton CPU is used extensively by 98% of its top 1,000 customers, and it recently signed a deal with Meta Platforms to deploy thousands of Graviton chips. That trend is further supported by both Microsoft and Alphabet, which started deploying their own Arm-based CPUs in their data centers over the last few years, ramping up quickly.
With the strong momentum behind the CPU market and Arm in particular, management estimates its royalty revenue growth will accelerate from a 14% compound annual growth rate over the last five years to 20% over the next five years.
Today’s Change
(5.47%) $18.34
Current Price
$353.61
Key Data Points
Market Cap
$376B
Day’s Range
$337.42 – $356.44
52wk Range
$100.02 – $356.45
Volume
409.8K
Avg Vol
9.3M
Gross Margin
94.08%
Is Arm’s new chip a catalyst for further growth?
It seems very likely that data centers will see an influx of Arm-based CPUs over the next few years, but Arm now wants to make and sell those chips itself. While licensing its intellectual property yields very high profit margins for the business, it accounts for only a tiny fraction of the actual spending on its chips. Arm estimates that selling its own designs directly can generate 10 times the gross profit per chip compared to the royalty model.
As such, it has developed the Arm AGI CPU. Management expects to sell $15 billion worth of its own chips by 2031, which could generate $7.5 billion in gross profit. To put that in perspective, Arm’s gross profit totaled $4.8 billion for the full year 2025. Management says it’s off to a strong start with $2 billion in demand across 2027 and 2028. However, it chose to maintain its outlook for $1 billion due to supply chain constraints.
Supply chain constraints should resolve themselves over time, especially given that Arm can demonstrate growing demand for its products and make longer-term commitments. That should lead to an accelerating ramp-up in production and sales for its first-party chips, and significant profit growth around the end of the decade.
Management expects the combined first-party chip and licensing businesses to generate about $25 billion in total revenue by 2031, resulting in $9 in earnings per share. That’s phenomenal growth from the $1.77 per share it generated last year.
But investors hoping for Arm to triple in value again face a significant challenge. The stock currently trades for 159 times analysts’ earnings estimates. Even if the company successfully grows its own chip business and its royalty revenue accelerates as expected, that’s an outrageously high valuation for the stock. That’s almost 18 times management’s 2031 guidance. It’s a tough price to justify buying the stock, let alone expecting it to triple once again.
