ARM Q2 FY3/26 Earnings Review
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Heating Up
ARM just put in a very nice quarter. Revenue growth is strong, cashflow margins are improving and the balance sheet continues to look solid. I believe that in any kind of sustained datacenter investment environment, ARM can do very well; its low-power-by-design processor IP is entering a great product-market-fit period as the power drain by GPU-based systems is getting to be a real strain on the system.
If the datacenter trade dies, ARM will die with it.
Let’s take a look at the numbers, the stock chart, valuation and our rating.
ARM Financial Summary
I noted a couple quarters back that something was amiss with ARM cashflows - you can see that with the dip to 3% unlevered pretax FCF margins in the March 2025 quarter. That has more than corrected now.
Cashflow still lags accounting profit but by a reasonable degree at this point - in March 2025 it had the whiff of accelerated profit recognition.
Note that a large percentage of ARM’s revenues come from ‘related parties’ - normally that’s a big red flag because can you be sure that the purchases were independently arrived at? Here I think we have to cut the company some slack - the two related parties are (i) the company’s China distributor and (ii) Softbank, which continues to own in excess of 80% of outstanding stock in ARM. I still don’t like it; related parties are related parties. But ARM has a near-monopoly on low power processor design so if any investor wants exposure to that market position, the related-party issue, and for that matter the giant overhang of Softbank-owned stock, is the price of admission. This would stop me personally having a very large allocation to the stock; it’s not enough to stop me owning smaller allocations.