Qualcomm and Arm see momentum in AI, but smartphone weakness weighs on both stocks

Shares of the chipmakers Qualcomm Inc. and Arm Holdings Plc were trading lower after-hours today after warning of sluggish demand in the smartphone industry due to rising prices relating to the cost of key components such as memory chips.

Qualcomm reported third-quarter earnings that fell just short of Wall Street’s expectations, and while it beat on revenue, its management warned that it’s going to have to take strong measures to protect its profit margins going forward. This includes a decision to raise prices across the board starting September 1, and looking for new ways to protect its supply chain.

“Cost went up, so prices are going to go up,” said Qualcomm Chief Executive Cristiano Amon (pictured) in a conference call with analysts.

The smartphone chipmaker just reported earnings before certain costs such as stock compensation of $2.21 per share, trailing Wall Street’s forecast of $2.23 per share. Revenue for the quarter came to $9.95 billion, ahead of the $9.67 billion estimate. For the current quarter, Qualcomm said it’s forecasting earnings of between $2.05 to $2.25 per share on sales of between $9.7 billion and $10.5 billion, but that’s below the Street’s target of $2.36 per share in earnings and $10.02 billion in sales. Qualcomm’s stock was down just over 3% on the report as investors digested what the forecast means.

In a press release, Qualcomm explained that the semiconductor industry is dealing with a “broad-based increase in input costs, across wafer fabrication, assembly, test, advanced packaging, memory and other materials,” though it noted that “revenues continue to be healthy.” Qualcomm’s main problem is that, unlike other chipmakers that increasingly cater towards the artificial intelligence industry that’s responsible for all of those soaring costs, its primary focus remains the smartphone industry. While the company has been trying to diversify into segments like cars, smart glasses and robots under Amon’s leadership, handset sales still account for the bulk of its revenue. During the quarter, handset chip sales generated $5.1 billion in revenue, down 21% compared to the same period one year earlier, due to what Amon said is a “bottoming market” in China.

The CEO explained that the dynamics in the smartphone market mean that low-end and mid-range phones are now a lot less competitive due to affordability issues. Even premium Android phones, where Qualcomm is dominant, are being viewed as too expensive by some customers, Amon said. ““Consumer preference within the premium category is changing towards a preference to the lower end of the premium, as well to last year’s phone, because of the memory price increases,” he told analysts on the call.

Qualcomm continues to pin its hopes on diversification, and said it’s still hoping for non-handset chip sales to reach 60% of its total revenue by the end of next year. The automotive segment was a bright spot during the quarter, generating $1.59 billion in sales. The company is also looking to capitalize on the AI infrastructure boom. Amon said the company is on track to do $5 billion in data center chip revenue next year. The company will be helped towards that goal by the recent acquisition of Modular Inc., a software company that makes programming technology for AI. The chipmaker said it’s planning to unveil a new AI software platform based on Modular’s technology next month.

Qualcomm’s Internet of Things business segment, which makes chips for industrial applications, smart glasses and robotics, delivered $1.83 billion in sales, up 9% from a year ago. The QTL business segment, which licenses intellectual property for cellular connections and other chip technologies to third parties, generated $1.28 billion in revenue during the quarter, just ahead of the Street’s forecast of $1.26 billion.

Strong data center demand fails to boost Arm

Investors were similarly disappointed with Arm, whose stock was down more than 4% in the wake of today’s results. The British chip design firm reported fiscal 2027 first quarter adjusted earnings of 45 cents per share on revenue of $1.29 billion, up 22% from a year earlier. Analysts had been looking for earnings of 40 cents per share on sales of $1.26 billion.

For the current quarter, Arm said it’s looking for revenue of $1.38 billion, plus or minus $50 million, with earnings of between 43 cents and 51 cents per share. Analysts are targeting revenue of $1.35 billion and earnings of 45 cents per share.

The problem for Arm is that investors are growing increasingly nervous about the sluggishness and slowing growth rates in smartphone sales, overshadowing its expansion in AI data center chip sales. The company warned that its mobile royalty revenue is likely to soften sequentially. Previously, investors anticipated royalty growth of roughly 20%, but Arm updated its outlook for the current period to a lower growth rate in the low-to-middle teens percentage range.

Arm sells intellectual property that other chip companies ​license and pay royalties on for each unit shipped, but has recently decided to make its own central processing unit for the data center. Its designs are prized for their power efficiency, and that promises to be a critical advantage for data center operators who’re struggling with the soaring energy demands of massive AI models. Arm’s AGI central processing unit, a new chip that it first announced in March, has exceeded initial expectations, with demand surpassing $2 billion across fiscal 2027 and 2028, said Chief Executive Rene Haas. He added that the company has already delivered its first chips to multiple customers, including the cloud infrastructure giant Oracle Corp.

“We have new customers ​in North America and China,” Haas said, adding that the company can now secure supply for more than $1 billion ​worth of chips. “I ⁠feel better about (supply) than I did 90 days ago,” he said.

Jeffries analysts have forecast sales of Arm’s data center chips to reach $18 billion by fiscal 2031, but questions remain about the company’s ability to secure the production capacity needed to manufacture such huge numbers of chips.

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