After the performance, the stock price of Arm (ARM.US) plunged! Wall Street still holds strong support: "short-term pain" paves the way for long-term AI growth.

After releasing its financial report for the first quarter of the 2026 fiscal year, the stock price of Arm (ARM.US) fell by more than 13% on Thursday. However, analysts believe that the company's current high spending is for the future transformation into a stronger enterprise. The financial report showed that for the first quarter ending in June, Arm's revenue increased by 12% to $1.05 billion, with earnings per share of 35 cents, meeting analysts' expectations. In detail, licensing revenue was $468 million, a 1% decrease year-on-year but higher than the analyst average expectation of $456 million; royalty revenue was $585 million, a 25% increase year-on-year but slightly lower than the analyst expectation of $595 million. Looking ahead, revenue for Q2 is expected to be between $1.01 billion and $1.11 billion, below the analyst expectation of $1.06 billion; excluding certain items, earnings per share are expected to be between 29 and 37 cents, while the analyst average expectation is 35 cents. Arm is continuously increasing its spending to better seize the opportunities in the AI trend. The CEO of the company, Rene Haas, stated that Arm is dedicated to developing technology that will solidify its position in the AI field. He pointed out that in the short term, the increased spending will impact profits, but in the long term, it will drive a stronger growth for the company, "We have made a clear decision to increase investment and accelerate research and development." Analysts from Needham, Charles Shi and Ross Cole, in a report to investors on Thursday said, "As Arm appears to be transitioning from a traditional IP business model to a product business model, its cost structure seems to be undergoing significant changes. Management predicts a significant increase in operating expenses to support 'new opportunities,' which seems to imply that the company is entering the chip/chiplet field." The analysts added, "While we believe that Arm's transition from selling processor core IP to selling CSS (Custom SubSystems) has been mostly successful, as shown by the growth in patent licensing revenue above market expectations, the next transition will be a bigger leap, but might also come with a higher cost." Needham reiterated its "Hold" rating on Arm, noting that Softbank's role in Arm's strategic plan seems to be growing. The analysts stated, "They indicated that this transaction relates to Softbank's AI vision and the Stargate project, while also hinting that Arm may be transitioning its business model from selling traditional IP to selling chiplets or even complete chips, as suggested by Arm's 'trajectory'." Morgan Stanley maintained its "Overweight" rating and $194 target price, believing that the expected $655 million in operating expenses for the second quarter indicates that the company is preparing for long-term demand. Analysts led by Lee Simpson at Morgan Stanley said in a report, "As we predicted, the company is significantly increasing research and development spending and hiring efforts, which we believe is the most clear signal that Arm is gearing up for a range of new projects." Guggenheim analysts also agree with Arm's long-term strategy, reiterating a "Buy" rating and setting a target price at $187. Analysts John DiFucci and their team stated, "Of the companies we cover, we continue to believe that Arm is one of the clear beneficiaries of artificial intelligence, along with Oracle Corporation and Microsoft Corporation, these companies are expected to achieve reasonable growth and ultimately generate substantial profits. Although patent income is lower than expected (but still growing by 25% year-on-year) and profit expectations have been revised down, the post-market price drop is seen as a buying opportunity - after all, this may be a stock that will never be cheap, but can now be bought at a more attractive valuation." KeyBanc also believes that the decline in short-term earnings per share (EPS) reflects Arm's increase in investment for a brighter future. The firm reiterated its "Overweight" rating and raised the target price from $175 to $190. KeyBanc analysts John Vinh and Ryan Rosumny stated in a report, "As Arm acknowledges considering chip development, operating expenses are significantly increasing, although a final decision has not been made yet. We believe that developing a complete solution for Arm, while complex, could lead to billions in incremental revenue if it can capture a 10% market share."