Arm’s new chip business can accelerate growth, but its lower margins and substantial employee share costs limit earnings. My forecast allows strong expansion and a premium valuation, yet still points to substantial downside.
Key points
- $1.5 billion of FY28 chip sales underpins my forecast, not management’s demand pipeline.
- $2.0 billion of FY28 operating share compensation remains an expense in my model.
- $153.80 a share is my October 2027 target despite a generous earnings multiple.
The call
The market is too optimistic. At my 110-times earnings multiple, today’s quote requires $2.68 of FY28 earnings per share. Holding my licensing forecast and operating costs fixed, that would require approximately $5.9 billion of FY28 chip sales. This is a conditional valuation test, not a claim about investors’ exact forecasts.
Where June-quarter revenue went ($ millions)- Cash staff costs44935%
- Share compensation34327%
- Share-pay taxes987.6%
- Project and other costs23318%
- Amortization272.1%
- Depreciation483.7%
- Operating profit917.1%
Source: July 29, 2026 Form 6-K, Note 15; quarter ended June 30, 2026.
I expect growth, not a profit windfall. My FY28 licensing-and-royalty forecast includes $4.5 billion of royalties and $2.5 billion of other revenue. New chips add sales but retain much less profit than licensing. February’s promised supply-and-margin update should replace enthusiasm about customer demand with a clearer delivery schedule.
Valuation
| Our estimate or assumption | Figure |
|---|
| FY28 licensing and royalty revenue | $7.0 billion |
| FY28 production-chip revenue | $1.5 billion |
| FY28 operating profit | $1.79 billion |
| FY28 normalized earnings per share | $1.40 |
| October 2027 earnings multiple | 110 times |
| October 2027 target per share | $153.80 |
FY28 ends March 2028; the model uses 97% licensing gross margin and 40% chip gross margin, meaning sales retained after direct costs. Operating expenses total $5.6 billion, including share compensation; $150 million of interest income, a 20% tax rate and 1.11 billion diluted shares produce the unrounded earnings used for the target. The premium multiple rewards cloud growth despite high interest rates; rapid execution could lift my upside scenario to approximately $305, keeping this a sell rather than a strong sell.
How chip sales change the 12-month targetOur FY28 scenarios, October 8, 2026; other assumptions fixed, including 40% chip gross margin.
Risks
- Faster chip deliveries could defeat the call; watch binding orders, manufacturing capacity and shipment dates.
- Cloud royalties could exceed my forecast; watch whether total royalty growth accelerates despite weaker phones.
- Investors could sustain a richer multiple; watch earnings revisions alongside interest rates, not customer announcements alone.
What would change my mind
A disclosed, funded delivery schedule supporting roughly $6 billion of FY28 chip sales at 40% gross margin would overturn my central valuation assumption.
