Phones have become costlier to build this year, and the reason sits far from any phone store. Memory chips, which hold photos and run apps, have grown scarce as their makers chase AI data center orders.
Higher memory prices could raise the cost of the parts inside a smartphone by 15% or more, Counterpoint Research estimated, according to Bloomberg. This week, that pressure showed up in the results of Arm Holdings (ARM).
The British chip designer reported fiscal second quarter results on Wednesday, November 4, 2026. Royalty revenue grew just 8% to $670 million, and its shareholder letter cited “the impact of memory pricing on the smartphone market” as a drag.
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The twist is where that pressure comes from. The cloud giants behind Arm’s fastest royalty growth are the same buyers whose demand is pulling memory production away from phones.
The memory crunch reached Arm through phones
Arm mostly does not make chips. It designs blueprints that companies such as Qualcomm (QCOM) build on, then collects a small royalty on each chip shipped.
That model works when phone sales grow. Fewer phones built means fewer chips shipped, and fewer royalty payments.
The memory squeeze pushes in exactly that direction. Memory makers have steered production toward premium AI server chips, while tech giants pay extra for multiyear supply deals, Bloomberg reported.
IDC projected the global smartphone market will shrink 12.9% in 2026, the sharpest drop on record, according to the same report. Qualcomm flagged China, where cheaper phones compete hardest on cost, as a likely hot spot. For shoppers, that can mean paying more for the next phone upgrade.
Data centers now carry Arm’s royalty growth
Yet the same spending is also behind Arm’s fastest-growing royalties. Data center royalties doubled from a year earlier, the shareholder letter said, as more Arm-based chips went into servers.
Arm expects its share of the server market at the largest cloud providers to top 60% by the end of 2026, according to the letter. That is a sharp turn for a company built on phones.
In effect, Arm’s two businesses partly offset each other. A slower AI buildout would likely ease memory prices and help phones, but it would also cool data center royalties. That ties Arm stock to both the phone in your pocket and the servers behind AI.
Arm is raising its data center bet, too. Its own server chip, the Arm AGI CPU, is on track for first commercial deliveries in the fiscal quarter ending March 2027, the letter said.
Arm also said its confidence in reaching up to $2 billion in revenue from that chip over fiscal 2027 and 2028 has grown. That progress did little to protect the stock on Thursday.
Why Arm stock fell harder than its results
On paper, the quarter was strong. Total revenue rose 27% to $1.44 billion, Arm’s best second quarter ever, according to the letter.
Most of that lift came from licensing fees, not royalties. Arm calls licensing an early signal of future royalty growth. Bank of America analyst Vivek Arya put that lag at 12 to 24 months, CNBC reported.
Investors still sent the stock down about 13% on Thursday, Nov. 5. The weaker royalty number landed on the iShares Semiconductor ETF’s worst day since March 2020, according to CNBC.
CNBC tied the wider slide to worries that this week’s election results could bring more regulation of the AI buildout. Memory maker Micron Technology (MU) fell even harder than Arm, a sign that the selling reached well beyond one phone problem.
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Arm also tends to magnify market moves. StockAnalysis puts its beta, a gauge of how sharply a stock swings against the broader market, near 4. That helps explain why a rough market day hit Arm so hard.
After Thursday, shares sat more than 60% below their 52-week high. Even so, Wall Street trimmed its numbers without walking away.
JPMorgan, Barclays, and Wells Fargo cut their price targets, the level analysts expect in a year, but kept their ratings, according to StockAnalysis.
Bank of America, which rates the stock Neutral, cut its target to $230 from $260, still well above Thursday’s close. That gap suggests the market is pricing in more phone pain than many analysts are.
Arm’s next test arrives with its own chip
Arm guided fiscal third quarter revenue to $1.54 billion, plus or minus $50 million, according to the letter. How much help phones provide depends on memory supply, and that timing rests largely with memory makers, not Arm.
Meanwhile, Arm is about to start selling chips of its own. The letter said Arm remains “focused on expanding capacity to meet growing customer demand.” That makes the chip an execution test as much as a design one.
The AI buildout is reshuffling the parts everyday devices depend on. Arm shows how serving both the cloud and consumers can bring growth on one side and costs on the other.
Arm’s first shipments of that chip early next year will show whether its data center side can grow fast enough to cover for the phones.
