Arm Holdings plc (ARM) shares dropped 7.48% in after-hours trading on Wednesday, following a fiscal third-quarter earnings report that missed Wall Street expectations on licensing revenue despite record overall sales driven by AI-related demand.
The decline reflects renewed investor concerns over Arm’s heavy reliance on the smartphone market, still roughly half of its revenue, at a time when memory shortages and weakening consumer demand are pressuring key customers. For the three months ended December 31, 2025, Arm reported total revenue of $1.242 billion, a record quarterly figure that beat LSEG SmartEstimates (which prioritize consistently accurate analysts) and represented strong year-over-year growth.
However, licensing revenue—the higher-margin segment tied to upfront design fees and royalties—increased 25% to $505 million but fell 2.9% short of the $519.9 million FactSet consensus. Royalty revenue, which reflects chip shipments using Arm’s architecture, was not separately broken out but is known to be closely linked to smartphone production volumes. Andrew Jackson, equity analyst at Ortus Advisors, highlighted the licensing miss and guidance as primary drivers of the selloff.
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“Investors were also reacting to Arm’s guidance only slightly beating estimates, as well as a poor outlook delivered by its chip design customer Qualcomm,” he said.
Qualcomm, a major Arm licensee, reported fiscal first-quarter results that beat expectations but issued disappointing guidance due to a global memory shortage constraining smartphone production. Qualcomm shares fell 9.68% in after-hours trading on the same day, underscoring the interconnected pressures. Both companies signaled that handset makers may scale back production volumes as supply constraints persist, particularly for DRAM and NAND flash memory.
Rolf Bulk, an analyst at Futurum Group, told CNBC that such a scenario would also pressure Arm customers like Apple and Samsung, which together account for a significant portion of Arm’s royalty stream. Smartphones remain ARM’s largest end market, contributing roughly half of its revenues, even as exposure to data centers and edge computing devices grows rapidly.
Jackson cautioned: “ARM is trying to diversify into AI chips used for DC/servers, but the success of this remains uncertain, and its business model is still heavily reliant on royalties from chips used in consumer products such as handsets.”
He added that a potential decline in Chinese smartphone production—exacerbated by memory shortages—could further weaken Arm’s near-term outlook before any AI-driven recovery materializes. The memory shortage, driven by production prioritization toward high-margin HBM for AI data centers, has led to sharp price increases and constrained supply for consumer electronics. This dynamic has prompted warnings from memory leaders Samsung and SK Hynix that smartphone and PC makers will bear the brunt of the tightness.
Arm’s royalty model, which earns a percentage of each chip shipped using its architecture, is particularly vulnerable to production slowdowns in the handset segment. Despite the licensing shortfall, Arm’s overall performance underscored continued strength in AI-related areas. The company’s chip designs power most of the world’s smartphones and are increasingly deployed in AI data centers and edge devices, benefiting from the ongoing AI infrastructure buildout.
Executives reiterated confidence in long-term diversification, though near-term headwinds from consumer electronics remain a drag. Arm’s shares have faced broader tech market pressures in the lead-up to earnings and are down 4% year-to-date in 2026, even after significant gains since its 2023 IPO. The post-earnings reaction reflects investor caution about the pace of Arm’s transition from smartphone dominance to AI and data center growth.
As memory constraints persist and smartphone demand softens, the selloff in Arm and Qualcomm shares highlights the interconnected risks facing the semiconductor supply chain. With memory shortages constraining production and AI demand diverting capacity, companies reliant on consumer end-markets face near-term pressure—even as long-term AI tailwinds remain intact.