After the U.S. stock market closed on July 29, both Qualcomm and Arm released their earnings reports.
Let's start with Qualcomm. Its revenue was $9.947 billion, exceeding the consensus expectation of $9.67 billion. However, its non-GAAP earnings per share were $2.21, slightly below the expected $2.23. More importantly, for the next quarter, Qualcomm provided guidance of revenue between $9.7 billion and $10.5 billion and earnings per share between $2.05 and $2.25. According to Reuters' statistics, the market consensus was earnings per share of $2.36, meaning Qualcomm's upper guidance limit is still below expectations. This is not an "exceeding expectations" scenario; it's revenue beating expectations, profit slightly missing, and guidance significantly lower than expected.
Now, moving on to Arm. Its shareholder letter was clean, with revenue at $1.289 billion and adjusted earnings per share at $0.45, both beating expectations, and the next quarter's guidance also exceeded expectations. Arm's stock price initially dropped by 8.11% on that day, which occurred during normal trading hours before the earnings report was released. After the report came out, the stock price remained almost unchanged, but after the conference call concluded, it dropped by 7% to 8% in after-hours trading. The Bloomberg article's URL still had the phrase "Even exceeding expectations didn't impress investors," but the displayed headline had already been changed to "Slowdown in smartphones overshadows data center growth, Arm drops."
What happened in between? Both companies mentioned the same word in their earnings reports: memory.
Smartphone Contraction, Automotive Revival
Qualcomm's official financial presentation slides included a page specifically discussing the Android smartphone business. It stated that due to memory price increases and supply constraints, it is expected that the year-over-year revenue for QCT's Android smartphones in FY 2026 will decline by about 20%, dragging down the full-year earnings per share by more than $1.50. Qualcomm also announced a price increase on products effective September 1 to pass on the rising input costs.
This slide is the most direct evidence in both earnings reports. The memory price increase for Samsung resulted in 89.49 trillion Korean won in operating profit, while for Qualcomm, it translated into a specific bill of $1.50 per share.
You can also see it in the gross margin. Qualcomm's GAAP gross margin for this quarter was 53.1%, compared to 55.6% in the same period last year. According to the call transcript, the management described the QCT gross margin as "slightly below our historical range" due to the rising memory and input costs.
The revenue for the mobile business this quarter was $5.086 billion, a 20% year-over-year decrease. The automotive business was $1.588 billion, a 61% year-over-year increase, marking 23 consecutive quarters of double-digit growth. The gap between these two columns on the chart is rapidly narrowing, with automotive quarterly revenue approaching one-third of the mobile division for the first time.
There is a longer-term issue on the phone side as well. Official presentation materials stated that due to supply constraints, the decline in Apple product revenue will accelerate starting from the fourth quarter, with "our modem share on upcoming iPhones expected to be significantly below the previous estimate of 20%." According to a transcript of the call, Chief Financial Officer Akash Palkhiwala said Apple's revenue will drop by about 50% from the September quarter to the December quarter.
CEO Cristiano Amon gave a more memorable line on the call, as reported by Reuters, saying "We are essentially replacing Apple with cloud." The official wording is more cautious, with the presentation materials stating that the year-over-year growth in non-phone revenue in the 2027 fiscal year will replace all Apple product revenue from the 2026 fiscal year.
The cloud segment is currently a timeline. The revenue path provided by the company is around $300 million in the 2026 fiscal year, $5 billion in the 2027 fiscal year, and over $15 billion in the 2029 fiscal year. Within the $5 billion of the 2027 fiscal year, there are two mega-customers with custom chips, each contributing over $1 billion. One of them has already been disclosed, with Meta and Qualcomm signing a strategic agreement for a multi-generation CPU roadmap, with the first Dragonfly C1000 expected to start production in the second half of 2028.
Seaport Global analyst Jay Goldberg's assessment to Reuters was less kind, stating that Qualcomm "is seeing Android share shift away from itself and has already lost almost all remaining share on the Apple side."
Arm's Conference Call Encounter
Arm's shareholder letter contained some impressive figures. Data center royalty revenue more than doubled year over year, marking the second consecutive quarter of doubling. The Neoverse architecture has shipped over 1.5 billion cores, with the most recent 500 million cores taking only 9 months, while the first 1 billion cores took 6 years. The shareholder letter also referenced IDC data, stating that Arm architecture's accelerated server platform spending has nearly doubled in the past two quarters and has surpassed the x86 platform.
The dark line on the graph tells another story. This quarter's royalty revenue was $715 million, a 22% year-over-year growth, but it did not surpass the $737 million from the third quarter of the 2026 fiscal year. That was the peak single-quarter royalty value for Arm. Licensing fees have always experienced significant fluctuations, with year-over-year growth rates fluctuating between -15% to +72%, but the market always looks at the smooth upward trend of the royalty line, which did not reach a new high this quarter.
The stock price actually turned downward due to a guidance revision during the earnings call. According to the call transcript, Arm revised down its full-year royalty growth guidance from around 20% to the high teens, citing a weak smartphone market and high memory prices, and anticipates a double-digit decline in the smartphone market. In the guidance for the next quarter, licensing revenue is expected to grow by around 30% year-on-year, while royalties are only in the low teens.
Why No Price Increase Even with Exceeding Expectations?
As of the close on July 29, Arm's forward P/E ratio is 103.66 times, Qualcomm's is 15.22 times, a difference of 6.8 times between the two. Another notable comparison is with Nvidia; Arm's forward P/E ratio is 5.4 times higher than Nvidia's at 19.07 times, while Nvidia's trailing twelve-month revenue of $253.49 billion is 49 times that of Arm.
TechTimes explained this phenomenon well in an analysis after the earnings report, stating that at a forward P/E ratio of 100 to 120 times, "a clean beat is no longer sufficient to drive the stock price up." This statement explains a common trend that extends beyond Arm. When the valuation has already priced in the growth of several years into the future, the function of the financial report shifts from providing surprises to confirming assumptions, and any failure to confirm will be magnified.
There is another variable that most reports did not mention. It was reported that the U.S. Federal Trade Commission launched a formal antitrust probe against Arm starting in May 2026, to investigate whether it would weaken or refuse to provide CPU architecture licenses to competitors after launching its in-house AGI CPU. Parallel investigations are being conducted by South Korea and the European Commission. If regulators ultimately demand nondiscriminatory pricing, Arm's long-term model with $250 billion in revenue for the 2031 fiscal year would require a reassessment of profit margin assumptions.
There was progress in Arm's in-house chip line this quarter. A shareholder letter stated that there is already over $2 billion in customer demand for AGI CPUs spanning the fiscal years 2027 and 2028, doubling from the $1 billion opportunity disclosed in the previous quarter. New customers include multiple clients from the U.S. and China. Jefferies is more optimistic than Reuters, estimating that this business could reach $18 billion by the 2031 fiscal year, higher than Arm's own $15 billion projection.
Not Just About Two Companies
According to statistics, the Philadelphia Semiconductor Index fell by 18.2% in July, after doubling in the first half of the year. In July, 19 technology stocks dropped by over 25%, with most of them being semiconductor stocks, including 7 that still have triple-digit gains year-to-date.
The arrangement of these points in the chart is very clear: the biggest decliners in July are basically the ones that have surged the most this year. SanDisk fell by 40.4% in July but is still up 471% year-to-date. Micron dropped by 26.5% in July but has risen by 197% this year. Arm saw a 36.6% decline in July after a 105.7% YTD increase.
Qualcomm is the exception to this trend. It fell by 15.75% in July and is down 8.99% YTD. It is not part of the crowded valuation group because it does not have a squeezable AI premium. Thirty-six analysts rate it as a Hold, with an average target price of $220.57, representing a 40% upside from the current price. Forty analysts rate Arm as a Buy.
On the same day, two other earnings reports can be compared. Microsoft reported $90 billion in revenue with Azure growing at 43%, leading to an initial 8% post-market surge. Meta reported $60.8 billion in revenue with 28% growth, but a decline in net income, causing an 8% to 10% post-market drop. Samsung achieved a record operating profit, resulting in a stable stock price for the day.
The increase in memory prices allowed Samsung to earn what NVIDIA makes in a quarter, while on the other side of the same balance sheet, Qualcomm and Arm each had their own story in the earnings report.
Welcome to join the official BlockBeats community:
Telegram Subscription Group: https://t.me/theblockbeats
Telegram Discussion Group: https://t.me/BlockBeats_App
Official Twitter Account: https://twitter.com/BlockBeatsAsia
