Arm Takes Aim at Nvidia and Amazon with Server Chip Ambition

Arm Holdings is making a significant shift in its business model by introducing physical server chips for data centers, putting it directly in competition with industry giants Nvidia and Amazon.

This move marks a turning point for Arm, which has spent the last thirty years designing instruction sets that power smartphones and collecting royalties on those designs. The company's decision to enter the market with its own AGI server CPU is driven by the growing demand for artificial intelligence compute in data centers.

Arm estimates the data center CPU market will reach $220 billion by 2031, up from a previous projection of $100 billion. To tap into this lucrative market, Arm needs to develop supply chain infrastructure and distribution relationships that are currently beyond its expertise as an intellectual property company.

The transition is already underway, with Arm reporting $715 million in royalty revenue for the quarter, including doubled data center royalties for a second consecutive period. The company projects its server CPU segment will clear $1 billion in annual revenue by fiscal 2028, supported by a backlog exceeding $2 billion.

However, some investors are skeptical about Arm's ability to execute this ambitious plan. A stock trading at over 100 times forward earnings on fiscal 2027 estimates raises concerns about the company's valuation and its capacity to manage the risks associated with entering a new market.