The latest results from Arm Holdings (NASDAQ:ARM) and Qualcomm (NASDAQ:QCOM) have exposed two different vulnerabilities in the semiconductor industry: questions over the sustainability of AI-related chip growth and the weakness of the traditional smartphone market.
Both companies reported quarterly results after-hours on 4 November, but investors focused on what was missing rather than what was beating expectations.
| Arm Holdings (NASDAQ:ARM) | Price: $183.60 (-4% after-hours) | Market cap: $204.84bn |
| Qualcomm (NASDAQ:QCOM) | Price: $157.57 (10% after-hours) | Market cap: $181.85bn |
Arm shares fell approximately 4% in after-hours trading, despite beating revenue and earnings forecasts. Qualcomm suffered a steeper decline of nearly 10%, as weakness in smartphone chip sales overshadowed encouraging progress in its data centre business.
For UK retail investors, the message is important: the semiconductor growth story remains intact, but investors are becoming considerably more demanding about the quality of earnings, profit margins and future growth.
1. Arm: strong AI demand, but royalties disappoint
Arm’s fiscal second-quarter results initially looked encouraging.
Revenue increased to $1.44bn, beating analyst expectations of approximately $1.38bn, while adjusted earnings of $0.52 per share comfortably exceeded the $0.47 consensus.
However, the composition of that growth disappointed investors.
| Arm Q2 FY2027 | Actual | Analyst expectations |
| Revenue | $1.44bn | $1.38bn |
| Adjusted EPS | $0.52 | $0.47 |
| Licensing revenue | $773m | $625m |
| Royalty revenue | $670m | $721m |
Source: Company results and analyst consensus reported by Investing.com.
The problem is that licensing revenue, which comes from customers paying upfront to use Arm’s technology, is inherently lumpy.
Royalty revenue is arguably a more important indicator of underlying demand because Arm receives payments when customers ship chips incorporating its designs.
The 6.3% sequential decline in royalties, from $715m to $670m, therefore raised questions about whether the impressive licensing performance was masking slower underlying momentum.
Management remains bullish
Chief executive Rene Haas and finance chief Jason Child told shareholders that AI was driving unprecedented demand across cloud computing, devices and autonomous systems.
They also highlighted the rapid adoption of Arm-based processors in hyperscale data centres.
Arm said its server market share among major hyperscalers had increased from 15% in 2024 to more than 50% in 2025, with management expecting it to exceed 60% by the end of 2026.
The company also reported strong demand for its new Arm AGI CPU, targeting AI data centres, with management expressing confidence in up to $2bn of customer demand.
The difficulty for investors is that expectations were already exceptionally high.
Arm forecast fiscal Q3 revenue of approximately $1.54bn, only marginally above the $1.53bn analyst consensus. That was not the significant guidance upgrade some investors wanted.
2. Qualcomm: smartphone weakness overwhelms AI opportunity
Qualcomm’s results were more concerning because they exposed the vulnerability of its largest revenue stream.
Q4 adjusted revenue fell 7% year-on-year to $10.44bn, although this narrowly beat expectations of $10.11bn. Adjusted earnings of $2.17 per share also edged past forecasts of $2.16.
The bigger problem was smartphone demand.
| Qualcomm Q4 FY2026 | Actual | Analyst expectations |
| Adjusted revenue | $10.44bn | $10.11bn |
| Adjusted EPS | $2.17 | $2.16 |
| Handset revenue | $5.14bn | $5.25bn |
| QCT chip revenue | $9.02bn | — |
| Handset revenue growth | -26% | — |
Source: Reuters and Visible Alpha.
Global smartphone shipments fell 20% in the September quarter to a 14-year low, according to Counterpoint Research, as rising memory prices pushed up device costs.
This is particularly problematic for Qualcomm because smartphones remain its biggest business.
Apple’s (NASDAQ:AAPL) transition towards its own modem technology is another structural headwind, with Qualcomm warning that iPhone-related revenue is declining faster than previously anticipated.
Management insists the recovery is coming
CEO Cristiano Amon told Reuters:
‘Unlike some other companies, we called this memory thing early, and we prepared for it.’
He also said Android handset sales were beginning to recover sequentially.
Amon is attempting to reposition Qualcomm as a broader computing and connectivity business rather than simply a smartphone chip supplier.
The company highlighted several opportunities:
- AI data centres: Qualcomm expects $650m of data centre sales in fiscal Q1, ahead of analyst expectations of $539m.
- Hyperscalers: Partnerships with Amazon, Microsoft and Meta provide opportunities to supply custom AI processors and accelerators.
- Automotive: Continued expansion into vehicle computing, connectivity and advanced driver assistance.
- Satellite connectivity: A multiyear agreement with SpaceX (NASDAQ:SPCX) will see Qualcomm supply equipment for its planned Starlink Mobile network.
Management is targeting $15bn of annual data centre revenue by fiscal 2029.
However, investors were more concerned about near-term profitability.
Chief financial officer Akash Palkhiwala said gross margins should return to their historical 48%-50% range by the second quarter of fiscal 2027, as higher chip prices offset rising input costs.
Bernstein analyst Stacy Rasgon was less optimistic, describing Qualcomm’s ‘margin outlook is lousy’.
That sums up the immediate investment dilemma: Qualcomm may be building an attractive AI business, but investors still need to see it translate into earnings growth.
3. What does this mean for the semiconductor industry?
The two results highlight three important developments.
1. AI demand is creating winners and losers.
AI infrastructure investment continues to benefit companies supplying processors, networking equipment and semiconductor intellectual property.
Arm’s growing presence in hyperscale data centres demonstrates that opportunity.
However, AI infrastructure spending is also absorbing scarce memory capacity and increasing costs elsewhere in the semiconductor supply chain.
Qualcomm’s smartphone difficulties illustrate how this can create unintended consequences for traditional chip markets.
2. Memory shortages could become a wider industry problem.
Rising memory prices are making smartphones more expensive and potentially delaying upgrades.
This creates a difficult environment for chipmakers dependent on consumer electronics demand, even while AI-related demand remains strong.
3. Investors are becoming more selective about AI valuations.
Companies can beat quarterly forecasts and still see their shares fall if guidance, margins or underlying revenue quality disappoint.
This is particularly relevant following the October sell-off in semiconductor shares, when the Philadelphia Semiconductor Index declined 15.4%.
4. Are Arm and Qualcomm shares attractive after the falls?
The valuation contrast is significant.
| Valuation indicator | Arm | Qualcomm |
| Indicative PE | 195x trailing | 20x trailing |
| Forward PE | ~70x | ~17x |
| Investment proposition | AI infrastructure growth | Diversification and earnings recovery |
| Principal risk | Premium valuation and royalty growth | Smartphone weakness and margins |
Sources: Stockopedia. These are indicative rather than directly comparable valuation measures.
Arm: exceptional business, demanding valuation
Arm’s architecture is becoming increasingly important in AI infrastructure, cloud computing and energy-efficient processors.
But a valuation approaching 70x forward earnings leaves little room for disappointment.
Goldman Sachs reiterated its Sell rating with a $160 price target, compared with the $191.80 reference price reported on 4 November.
Barclays, meanwhile, maintained an Overweight rating but reduced its target from $360 to $325, highlighting weaker royalty growth and the investment required to develop its own silicon products.
Qualcomm: potentially better value, but needs execution
Qualcomm trades on a considerably lower valuation, at approximately 17x forward earnings.
Its established smartphone franchise, licensing income, automotive business and emerging AI opportunity provide several potential growth drivers.
However, Morgan Stanley analysts questioned whether its custom-chip opportunity could deliver the anticipated growth, saying they lacked conviction in a three-year ramp.
At this valuation, Qualcomm arguably offers a more interesting risk/reward proposition than Arm, but only if margins recover and non-handset revenues accelerate.
5. What should investors watch next?
| Catalyst | Why it matters |
| Arm royalty growth | Confirms whether chip shipments are translating into recurring revenue |
| Arm AGI CPU deliveries | Tests whether the $2bn opportunity becomes commercial revenue |
| Qualcomm smartphone shipments | Indicates whether the handset downturn is bottoming |
| Memory chip pricing | Determines pressure on device demand and semiconductor margins |
| Qualcomm data-centre sales | Tests whether AI diversification can offset smartphone weakness |
| Apple modem transition | Determines how quickly Qualcomm loses remaining iPhone revenue |
| Arm–Qualcomm legal dispute | Could affect future licensing arrangements and royalty economics |
The next few quarters will be particularly important in establishing whether management’s optimism is supported by actual financial performance.
Sharesify investor verdict
The latest sell-off does not mean the AI semiconductor boom is over. Instead, it highlights the increasingly uneven distribution of its benefits.
How to invest in semiconductor stocks: A UK beginner’s guide 2026
Arm remains strategically well positioned to benefit from the expansion of AI infrastructure, but its valuation makes it vulnerable to even relatively small disappointments in royalty growth.
Qualcomm looks cheaper and has potentially significant opportunities in AI computing, automotive and connectivity. However, its smartphone business remains a substantial earnings exposure, while rising component costs threaten near-term profitability.
For investors, Qualcomm currently looks the more interesting valuation proposition, while Arm offers greater exposure to the structural AI infrastructure opportunity. Neither is an obvious bargain simply because its shares have fallen.
The key question is no longer whether demand for chips will grow, but which companies can convert that demand into sustainable revenue, margins and cash flow.
Sharesify note: US-listed shares are denominated in dollars. UK investors should also consider sterling/dollar movements, currency conversion costs and the tax treatment of overseas shares held in a Stocks & Shares ISA or SIPP.
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