Arm HoldingsARM

U.S. employers cut 23,000 jobs in July, a surprise drop when analysts were expecting a gain of about 80,000. Hiring numbers from the previous two months were also revised lower, suggesting the labor market is weaker than it appeared earlier this summer.

For a company like Arm, this is a sign of a cooling economy that could eventually weigh on consumer spending. While Arm is currently benefiting from heavy spending on AI data centers, a broader economic slowdown often leads to fewer people buying new smartphones and laptops, which are still the biggest drivers of the royalties Arm collects.

Source: Bloomberg Markets and Finance

Investors are increasingly focused on the high cost of building AI infrastructure. The big cloud companies are spending billions of dollars on data centers, which has been the primary engine for chip demand.

This matters for Arm because its energy-efficient designs are becoming the standard for these new data centers. However, if the companies paying for this infrastructure decide the costs are too high or the returns are too slow, it could lead to a pullback in the orders that have fueled the recent growth in the chip sector.

Amazon reported that its cloud computing arm, AWS, grew faster than expected due to high demand for AI services. This is a positive signal for the company because its energy-efficient chip designs are increasingly being used in the large data centers that power these AI applications.

When the major cloud providers spend more on infrastructure, it generally increases the opportunity for the company to license its high-value v9 architecture, which earns roughly double the royalties of its older designs.

The China Beige Book reported weakening consumer spending in the Chinese economy. This is a relevant signal for the company because a large portion of its royalty revenue still comes from the smartphone market, where China is a major driver of demand. While the company is successfully expanding into AI servers, any prolonged slowdown in Chinese consumer electronics could act as a drag on the growth of its core mobile business.

Source: CNBC Television

Citi analysts kept their Buy rating and $300 price target on the stock, even as the company faces a slower recovery in the smartphone market. The firm slightly increased its profit estimates for 2027, arguing that the massive shift toward AI infrastructure in data centers is more than making up for the sluggishness in mobile phones.

This highlights the core of the bull case for the company. While Arm's blueprints are in almost every phone, the real growth is coming from data centers that need more energy-efficient chips to run AI. Because these newer server designs command much higher royalty fees than phone chips, the company can grow its earnings even if the total number of devices sold doesn't increase.

Source: Proactive Investors