Arm’s Post-Earnings Slump: Recession Indicator?

On the 30th of July 2025, British semiconductor architecture design Arm Holdings’ (ticker: ARM) released its earnings report for the first quarter (Q1) of its Fiscal Year (FY) of 2026. While analysts weren’t impressed by the growth shown – leading to a nearly 15% drop since then and up to the 5th of August – there are numerous other points that need to borne in mind regarding the company’s forward outlook.

Trend Analysis

If trends exhibited in Q1 2026 were to continue, revenue growth for the current FY is expected to be only 4%. However, the bottom line – net income per share – isn’t going to show the bumper growth seen in the previous FY.

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Source: Company Information; Leverage Shares analysis

Operating expenses are trending to close the FY 20% higher than the previous FY – a three-fold increase – while net income is trending to be 36% lower than previous FY’s massive net income burst.

Within Arm’s revenue streams, “Related Parties” is a knotty conundrum: in addition to enterprises that it partners with and who they buy technology from for their offering (and other similar complicated relationships), it also includes Arm China – which licenses certain numbers of Arm’s technology and sublicenses to Chinese businesses who also license some parts of Arm’s technology directly. In an environment wherein technology transfers from the Western Hemisphere to China are being monitored, this line item sticks out as a risk. In FY 2026, it’s “External Customers”, i.e. technology companies that aren’t necessarily in China or Chinese enterprises, revenues are presently trending towards a downturn of 8% from previous FY. “Related Parties”, on the other hand, are trending towards a massive 60% bump over previous FY.

The rising importance of “Related Parties” mustn’t be understated in Arm’s case.

Source: Company Information; Leverage Shares analysis

There is a very strong correlation (if not an outright match) between the contributions of “Related Parties” and Arm China’s stated revenue contributions. As per the company’s annual reports, revenues attributable to Arm’s relationship with Arm China were approximately 18%, 24%, 21% and 17% of its total revenue in FY 2022, FY 2023, FY 2024 and FY 2025, respectively.

On the 30th of July, CEO Rene Haas stated¹ that the company was “consciously deciding to invest more heavily in technology beyond designs”, confirming that the company is considering designing its own processors – which also explains the near 50% increase in R&D’s share in operating expenses in Q1 2026 from FY 2022. Operating expenses nearly equal that of total revenue earned in the period, leading the massive drop in operating margin and net profit margin.

A hint of a greater ask possibly from Chinese clients unable to access advanced U.S. technology freely due to export restrictions enacted over the past two U.S. administrations and the current one came during the earnings call when CEO Haas said, “One of the things that we’re seeing with newer customers, such as CSPs (note: « cloud service providers”) and OEMs (note: “original equipment manufacturers”) and also even traditional customers, has asked for a better starting point” leading the company to consider developing chiplets that could be integrated into a custom chip, the entire chip itself, additional subsystems or more. How this plays out in the face of the technology exports restrictions regime remains to be seen.

In Conclusion

Given how central consumer electronics such as smartphones and other personal devices for the sales of royalty licenses, the early trends of a downturn in revenues from “External Customers” might be an indicator of rising tightness in affordability and, therefore, an early recessionary indicator. The company’s forward guidance for Q2 2026 seems to buttress this argument: Looking ahead, Arm’s guidance for the fiscal second quarter also falls short of estimates. The company’s forecasted non-GAAP Earning Per Share between $0.29 and $0.37 is slightly below² the mid-point consensus estimate of $0.35, while the forecasted revenue of $1.01 billion to $1.11 billion is somewhere around Wall Street’s $1.07 billion midpoint estimate.

Furthermore, the possibility of expanding business within what is effectively a sanctioned country as well as building out products that turns its clients into competitors create additional strategic risks. The stock’s price trajectory is likely to be rocky as these conditions create a substantial likelihood for downsides in future earnings, thereby making stock performance going forward quite rocky.

Professional investors in Europe who might want to leverage the stock’s performance during potential bull runs might like to consider the +3x Long ARM ETP (ARM3) for magnified exposure during upsides of the stock’s trajectory.

Footnotes:

« Arm shares slip as smartphone royalties disappoint », CNBC, 30 July 2025
« ARM Holdings reports soft guidance after mixed fiscal Q1 results; shares slump », Investing.com News, 31 July 2025

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