Source: Company Information; Leverage Shares analysis

As estimated in the previous article, operating margin sees a 600% improvement over the previous FY and brought it to the 20%+ levels. Meanwhile net profit margin stayed in the 20% level achieved by Q3. In the final quarter of its FY 25, “related parties” — which include the likes of Apple (AAPL), to whom they supply software services — slightly dipped in revenue contribution while chipmakers — who constitute the bulk of its “external customers” — slightly upped their contribution.

The first factor behind the drop in the stock is two-fold. In the course of the earnings call:

• Arm forecast Q1 2026 revenue in the $1.0-$1.10 billion range, with a midpoint below analysts‘ average estimate of $1.10 billion. Also, forecasted were adjusted profits of $0.3-$0.38 cents per share, which was below the estimate of $0.42 cents per share.

• Arm traditionally provides full-year guidance at the conclusion of every FY release. This time, however, CFO Jason Child said, „Given the uncertainty of the global trade and economic picture, we have lower visibility than is traditional to start the year. As a result, we do not consider it prudent to issue full-year guidance.“

CEO Rene Haas stated that the below-expectations guidance is due to a large licensing deal that may not close during Q1 2026. Juxtaposing current events with the language employed, it’s likely that this prospective deal was with a party with ties to the People’s Republic of China.

Arm’s near-omnipresent status in the semiconductor space is predicated on forming relationships with chipmakers all over the world. In the present day, forming relationships in China is a widely-accepted and Wall Street analyst-heralded positive signal for any company, let alone a company like Arm that is square within a sector the Chinese government is spinning money to build out.

While political reactions to President Trump’s tariff war against practically every U.S. trading partner are divided along parties, China is largely a matter of bipartisan consensus. In 2017, the Office of the United States Trade Representative estimated the cost of Chinese IP infringement² to the U.S. economy at $225–$600 billion yearly. In a 2019 CNBC survey³, 1 in 5 U.S. corporations stated China has stolen IP within the previous year, while 1 in 3 said it had happened some times during the previous century. In 2022, a Chinese state-backed hacker group was accused of stealing trillions of dollars‘ worth of IP from 30 multinational corporations⁴. Given that targeted measures to limit theft and calls to the Chinese government to halt the theft failed or fell on deaf ears, both the previous administration as well as the current administration brought into place actions to limit China’s access to technology. The current tariff war — at least as it relates to China — will likely continue to resonate for years to come.

For a company like Arm, that specializes in holding IP, the long arm of trade barriers will likely fall heavy.

The second factor is the valuation of the ticker itself, which is wildly high.