Nvidia said it has visibility to nearly $20 billion in total CPU revenue this year during its most recent earnings call. Amazon says its Graviton CPU is used extensively by 98% of its top 1,000 customers, and it recently signed a deal with Meta Platforms to deploy thousands of Graviton chips. That trend is further supported by both Microsoft and Alphabet, which started deploying their own Arm-based CPUs in their data centers over the last few years, ramping up quickly.

With the strong momentum behind the CPU market and Arm in particular, management estimates its royalty revenue growth will accelerate from a 14% compound annual growth rate over the last five years to 20% over the next five years.

Is Arm’s new chip a catalyst for further growth?

It seems very likely that data centers will see an influx of Arm-based CPUs over the next few years, but Arm now wants to make and sell those chips itself. While licensing its intellectual property yields very high profit margins for the business, it accounts for only a tiny fraction of the actual spending on its chips. Arm estimates that selling its own designs directly can generate 10 times the gross profit per chip compared to the royalty model.

As such, it has developed the Arm AGI CPU. Management expects to sell $15 billion worth of its own chips by 2031, which could generate $7.5 billion in gross profit. To put that in perspective, Arm’s gross profit totaled $4.8 billion for the full year 2025. Management says it’s off to a strong start with $2 billion in demand across 2027 and 2028. However, it chose to maintain its outlook for $1 billion due to supply chain constraints.

Supply chain constraints should resolve themselves over time, especially given that Arm can demonstrate growing demand for its products and make longer-term commitments. That should lead to an accelerating ramp-up in production and sales for its first-party chips, and significant profit growth around the end of the decade.

Management expects the combined first-party chip and licensing businesses to generate about $25 billion in total revenue by 2031, resulting in $9 in earnings per share. That’s phenomenal growth from the $1.77 per share it generated last year.

But investors hoping for Arm to triple in value again face a significant challenge. The stock currently trades for 159 times analysts’ earnings estimates. Even if the company successfully grows its own chip business and its royalty revenue accelerates as expected, that’s an outrageously high valuation for the stock. That’s almost 18 times management’s 2031 guidance. It’s a tough price to justify buying the stock, let alone expecting it to triple once again.

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Adam Levy has positions in Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Intel, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

Can Arm Holdings Triple Your Money by the End of the Year? was originally published by The Motley Fool