For investors following the semiconductor sector, the recent financial reports from Qualcomm and Arm Holdings were supposed to be confirmation of an AI-driven bull market. Instead, the market received a lesson in basic logistics: even the most powerful processor is useless without a memory bone. The steep falls in the shares of both companies – by 11% and 7% respectively – signal that the smartphone industry has collided with a wall that cannot be jumped over by chip architecture innovations alone.
Crisis of completeness
The problem facing Cristiano Amon of Qualcomm and Jason Child of Arm is not a lack of interest in their technology. It is a product ‘completeness’ crisis. Qualcomm, despite its solid position in the premium segment, is struggling with summer orders because handset manufacturers are unable to secure adequate memory allocations. Without them, shipping a finished device is impossible. The result? Revenue forecasts below expectations and the spectre of stagnation, which according to analysts J.P. Morgan and Morningstar could last until 2027.
The situation is hitting Arm with a roar. The company’s royalty-based business model is directly dependent on the number of devices sold. If mobile processors are backlogged because there is a shortage of companion components for them, the royalty stream dries up. The estimated 2 per cent decline in royalty revenue at Arm is a conservative forecast in the face of Counterpoint Research’s prediction of a 7 per cent decline in advanced chip shipments in 2026.
New card division
For business, the lesson is clear: rising memory costs will change the market structure. OEMs, squeezed by the high margins of component suppliers, are likely to abandon the mid- and low-end segments, focusing on flagships that can bear the higher production costs. This makes it imperative for Qualcomm and Arm to accelerate their escape from the smartphone monoculture.
The hope remains data centres. Amon rightly points out that shortages in the mobile sector need not inhibit AI chip deployments for server rooms. This is where the burden of the battle for margins shifts. Investors who have hitherto seen Qualcomm and Arm mainly as ‘phone companies’ must now assess them through the prism of their ability to diversify into AI infrastructure, where the hunger for computing is even greater than in the pocket of the average consumer.
