Core Insights - AppLovin Corporation (APP) and Arm Holdings plc (ARM) are both positioned as leaders in the rapidly growing artificial intelligence sector, despite operating in different segments of the technology ecosystem [1][2] AppLovin Corporation (APP) - AppLovin is enhancing its advertising performance through advanced machine learning systems, focusing on app monetization and marketing automation [2] - The company is prioritizing improvements in advertiser onboarding, AI-based support tools, generative AI for ad creation, and marketing for its Axon Ads platform [3] - AppLovin is transitioning from a gaming-centric business to a more sophisticated digital advertising platform, utilizing machine learning to predict user behavior and optimize ad placements [4] - The company reported Q3 revenues of $1.41 billion, a 68% increase year-over-year, with adjusted EBITDA rising 79% to $1.16 billion, reflecting an 82% margin [6] - Free cash flow surged 92% to $1.05 billion, indicating strong cash generation capabilities [6] - AppLovin's MAX platform is experiencing growth due to rising advertiser demand and effective campaigns, solidifying its position in app-based advertising [7] - The company is projected to achieve 18% revenue growth and a 106% increase in earnings this year, showcasing significant operational leverage [14] Arm Holdings plc (ARM) - Arm Holdings is expanding its ecosystem and forming partnerships, such as with Meta, to enhance AI efficiency across various computing platforms [8] - The company is a key technology partner for major hyperscalers, with its designs contributing to improved energy efficiency and cost performance in chips [10] - Arm's Compute Subsystem (CSS) designs are streamlining chip development, reducing time-to-market and technical risks for manufacturers [11] - The Lumex CSS platform is set to power flagship devices from OPPO and vivo, enhancing mobile AI capabilities [12] - Arm reported Q2 revenues of $1.14 billion, a 34% year-over-year increase, with operating income rising 43% to achieve a 41.1% margin [13] - The company is projected to deliver 21.5% revenue growth but only a 5.5% increase in EPS, indicating a more gradual earnings expansion [17] Valuation Perspective - AppLovin trades at a forward P/E of 38.55x, slightly below its median, while Arm trades at 65.71x, reflecting high expectations for long-term AI and IoT opportunities [21] - AppLovin's stronger earnings growth and operational efficiency make its valuation more compelling compared to Arm [21] - Investors seeking near-term upside may find AppLovin to be a more attractive option, while Arm remains a strong long-term play in AI chip adoption [22]

Core Insights - A new wave of AI-driven demand is significantly reshaping the semiconductor industry, positioning Arm Holdings as a potential trillion-dollar company in the next decade [1] Financial Performance - Arm Holdings reported a record Q2 for fiscal 2026, with revenue increasing by 34% year-on-year to $1.14 billion, marking the third consecutive billion-dollar quarter [3] - Royalty sales reached an all-time high of $620 million, up 21%, driven by strong performance across smartphones, data centers, automobiles, and IoT [3] - Licensing annualized contract value (ACV) rose by 28%, continuing the momentum from Q1 [3] - Adjusted EPS increased by 30% to $0.39 per share [4] Market Demand and Trends - The demand for data center compute is a key catalyst for growth, with the Neoverse data center platform surpassing 1 billion CPUs deployed [4] - Major tech companies like Nvidia, Amazon, Google, and Microsoft are building custom silicon on Arm's architecture, contributing to royalty expansion [4] - Licensing revenue surged by 56% to $515 million, reflecting strong interest in next-generation AI architectures [4] Strategic Alliances and Innovations - Arm announced a strategic alliance with Meta to enhance AI efficiency across various computing levels, leveraging Arm's energy-efficient designs [5] - The relationship with Samsung was expanded, utilizing Arm's compute subsystem in Exynos chipsets to boost AI performance by up to 40% [5] - The launch of Lumex CSS, Arm's advanced mobile compute platform, enables on-device AI capabilities, with partners like OPPO and Vivo set to release flagship products [5]

Core Insights - Investors are cautious despite Arm Holdings plc's record-breaking Q2 fiscal 2026 earnings, with the stock declining about 7% post-results due to concerns over valuation and spending [1][7][15] Financial Performance - Arm Holdings reported Q2 revenues of $1.14 billion, a 34% year-over-year increase, surpassing estimates by 6.5%, marking the third consecutive billion-dollar quarter [2][7] - Royalty revenues reached a record $620 million, up 21% year-over-year, driven by increased adoption of Arm's architecture, particularly in data centers [3] - Licensing revenues climbed 56% to $515 million, reflecting the growing adoption of Arm's designs for next-generation AI chips [4] - Non-GAAP operating income was $467 million, a 43% increase year-over-year, with an operating margin of 41.1%, up from 38.6% [12] Strategic Positioning - Arm's compute platforms are integral to major tech companies, with significant performance and energy efficiency gains demonstrated by platforms like Google's Axion [9] - The company has formed a strategic partnership with Meta Platforms to enhance AI efficiency across various computing environments [8] - The launch of Lumex CSS, Arm's advanced mobile compute platform, is expected to enhance mobile AI capabilities [11] Future Outlook - For Q3 fiscal 2026, Arm expects revenues between $1.175 billion and $1.275 billion, indicating approximately 25% year-over-year growth [14] - Licensing is projected to rise by 25% to 30%, while royalties are expected to increase just over 20% [14] Valuation Concerns - Arm's forward price-to-sales ratio stands at 28.52, significantly higher than the industry average of 7.78, indicating a high-expectation phase [16] - The company's heavy reinvestment cycle and stretched valuation may limit short-term returns, leading to a cautious investment stance [17]

Core Viewpoint - Arm Holdings has demonstrated strong earnings performance in Q2 of fiscal 2026, with revenue and earnings surpassing consensus estimates [1] Financial Performance - Revenue increased by 34% year over year to $1.14 billion, with royalty revenue rising 21% to $620 million and licensing revenue surging 56% to $515 million [2] - Adjusted net income grew by 32% year over year to $417 million [2] Market Dynamics - The demand for Arm's products is significantly driven by artificial intelligence (AI), although the stock price remains volatile [3] - Despite a strong earnings report, the stock experienced a nearly 9% decline in pre-market trading due to weaker fiscal guidance and rising tariff concerns [3][4] Demand Trends - Hyperscalers and large enterprises are increasing their computing capacity, which benefits Arm due to its focus on energy-efficient chip architectures [5] - Arm's Neoverse computing platform is foundational for custom data center CPUs, with over 1 billion CPUs deployed and Neoverse royalties increasing over 100% year over year [7] Licensing and Royalties - Smartphone royalties grew faster than the overall market, driven by demand for Armv9 and Compute Subsystem (CSS) architectures [8] - Licensing activity showed strong performance, with annualized contract value increasing by 28% year over year [9] Research and Development - Arm is heavily investing in R&D for next-generation architectures and computing subsystems, leading to a 31% year-over-year increase in adjusted operating expenses to $648 million [10] - The company has not provided a clear timeline for new products, which complicates financial modeling and valuation [12] Growth Catalysts - Arm's CPUs are increasingly used by hyperscalers and AI model developers, enhancing their price-performance capabilities [13] - There is growing demand for Arm's CPUs and Lumex CSS platform as AI workloads transition from cloud to local devices [14] - Arm's involvement in the Stargate initiative, aimed at investing $500 billion in data center capacity, could drive long-term revenue [15] Valuation - Shares are trading at a high valuation of over 65 times forward earnings, reflecting confidence in royalty revenue from Arm-based chips [16] - The elevated valuation presents a lower margin for error, as any slowdown in AI infrastructure spending could negatively impact share price [16] Investment Strategy - Given the strong fundamentals and associated risks, a dollar-cost averaging strategy is recommended for investors to manage volatility while capitalizing on potential upside [17]

Core Insights - Arm reported Q2 FY26 revenue of $1.14 billion, a year-over-year increase of 34% and a quarter-over-quarter increase of 8% [4] - The company achieved a GAAP gross margin of 97.4%, up 1.2 percentage points year-over-year, maintaining its leading position globally [4] - Non-GAAP operating profit margin rebounded to 41% after a decrease in expense ratios, despite high R&D costs [3] Financial Performance - GAAP operating profit was $160 million, a 155% increase year-over-year, with a GAAP operating margin of 14%, up 6 percentage points [4] - Non-GAAP net profit reached $420 million, a 32% year-over-year increase, with a Non-GAAP net profit margin of 37%, down 1 percentage point [4] - GAAP net profit was $240 million, a 122% increase year-over-year, with a GAAP net profit margin of 21%, up 8 percentage points [4] Revenue Breakdown - License & Other revenue was $520 million, a 56% year-over-year increase, with 48 Arm Total Access contracts signed [7] - Royalty revenue reached $620 million, a 21% year-over-year increase, driven by growth in data centers, mobile, automotive, and IoT markets [10] - The company’s annual contract value (ACV) was $1.6 billion, a 28% year-over-year increase, while remaining performance obligations (RPO) were $2.25 billion, down 6% year-over-year [7] Market Position and Future Outlook - Arm's Neoverse CPU platform has been deployed in over 1 billion CPUs, with expectations that nearly 50% of new server CPU chips will be Arm architecture by 2025 [13] - The company anticipates Q3 revenue of $1.225 billion, a 25% year-over-year increase, and expects Royalty revenue to grow slightly above 20% year-over-year [13] - Management expressed confidence in the growth of the License business pipeline for the remainder of the year, particularly in China [13] Strategic Developments - Arm announced a strategic partnership with Meta to enhance AI efficiency across various computing layers [13] - The acquisition of DreamBig Semiconductor focuses on Ethernet and RDMA controller IP, which are important for scale-up and scale-out applications [13] - The management's reluctance to provide full-year guidance has raised concerns in the market, despite positive indicators from recent performance [14]

Core Insights - ARM's efficiency in computing platforms is approximately 50% higher than competing solutions, leading to significant adoption by major companies like NVIDIA, Amazon, Google, Microsoft, and Tesla [1][2] - The unprecedented demand for computing power is primarily based on ARM technology, contributing to over 100% year-on-year growth in the Neoverse business segment [1][2] - The Chinese market has shown strong performance with historical high demand, driven mainly by license revenue, including a large licensing deal [1][7] Financial Performance - In Q2, SoftBank-related revenue increased from $126 million to $178 million, a rise of $52 million, which serves as a future reference benchmark [5] - The revenue from SoftBank includes IP licensing and design services, with design services having a lower profit margin [5] Strategic Initiatives - ARM's acquisition of DreamBig Semiconductor is aimed at enhancing its Ethernet and DMA controller capabilities, which will expand its product offerings [3] - Collaboration with SoftBank on the Stargate project is expected to provide significant business opportunities in data center construction [3] Market Trends - The infrastructure business is growing at twice the average rate of other categories, with expectations of a 15% to 20% revenue share in ARM's royalty income [6] - The shift in data center computing from training to inference is anticipated, with strong demand for ARM's technologies in edge computing [7] Future Outlook - ARM maintains confidence in its future prospects based on current capital expenditures and the ongoing strong AI cycle [1][7] - The company plans to provide clearer guidance for Q4 based on its licensing reserves and the timing of large licensing deals [1][7]

Financial Data and Key Metrics Changes - The company reported revenue of $1.14 billion for Q2, representing a 34% year-on-year increase, marking the third consecutive billion-dollar quarter [4][11] - Royalty revenue reached a record $620 million, up 21% year-on-year, driven by growth across all major markets [4][11] - Licensing revenue increased by 56% to $515 million, reflecting strong demand for next-generation architectures [4][13] - Non-GAAP operating income was $467 million, up 43% year-on-year, resulting in a non-GAAP operating margin of 41.1% [15] - Non-GAAP EPS was $0.39, exceeding the midpoint of guidance by 6 cents [15] Business Line Data and Key Metrics Changes - Royalty revenue from smartphones grew significantly faster than the market, driven by higher royalty rates per chip [12] - Data center royalties doubled year-on-year due to the deployment of Arm-based chips by hyperscaler companies [12] - The company signed three new compute subsystem (CSS) licenses, bringing the total to 19 across 11 companies, indicating strong demand for CSS [7][14] Market Data and Key Metrics Changes - The company noted unprecedented compute demand, particularly in data centers, where Neoverse royalties more than doubled year-on-year [4][21] - The automotive sector saw advancements with Arm's technologies, including Tesla's next-generation AI chip delivering up to 40x faster AI performance [9] - The software developer ecosystem has grown to over 22 million, representing over 80% of the world's developer base, which is a significant growth engine for the company [9] Company Strategy and Development Direction - The company announced a strategic partnership with Meta to enhance AI efficiency across various compute layers [6] - There is a focus on expanding into additional compute subsystems, chiplets, or complex SOCs to capture growing AI opportunities [10] - The company is committed to investing aggressively in R&D to support customer demand and innovation in next-generation architectures [10][16] Management's Comments on Operating Environment and Future Outlook - Management highlighted that power has become a bottleneck in data centers, emphasizing the efficiency of Arm's compute platform [20] - The demand for compute is expected to grow, particularly as AI workloads transition from cloud to edge devices [61] - The company remains optimistic about long-term growth, driven by the increasing demand for efficient compute solutions [16][71] Other Important Information - The company is exploring the acquisition of DreamBig Semiconductor to enhance its offerings in high-speed communications technology [24] - The relationship with SoftBank and its partners is seen as a significant opportunity for technology integration in data center solutions [27] Q&A Session Summary Question: AI opportunity and data center deals - Management expressed confidence in Arm's strategic positioning in the AI market, noting that power efficiency is a key advantage [20][21] Question: Acquisition of DreamBig Semiconductor - The acquisition is aimed at enhancing Arm's capabilities in Ethernet and RDMA controllers, crucial for data center networking [24] Question: Related party revenue and SoftBank relationship - Management indicated a significant increase in related party revenue, with a strong partnership with SoftBank providing opportunities for technology integration [26][36] Question: Operating expenses and future product announcements - Management stated that details on new products will be shared once certain milestones are achieved, emphasizing careful management of operating expenses [30][32] Question: SoftBank contribution and licensing pipeline - Management noted a $52 million increase in SoftBank-related revenue, with confidence in the licensing pipeline for the remainder of the year [36][66] Question: Revenue opportunity from Stargate and Lumex CSS - Management highlighted strong demand for compute and early royalty revenues from Lumex CSS, indicating faster adoption than expected [44][46] Question: Growth in data center royalty revenues - Management confirmed that the mix of royalty revenues from cloud and networking is expected to increase, potentially reaching 15-20% [52][53] Question: Chip demand and inference world implications - Management anticipates a shift from cloud-based training to edge-based inference, which will drive demand for Arm's solutions [60][61] Question: Performance in China - Management reported strong demand in China, with licensing being a significant driver of revenue growth in the region [65][66]