The AI-Memory Crosscurrents
Semiconductor giants Arm Holdings and Qualcomm saw their stock prices tumble in extended trading on February 4, 2026, following their respective quarterly earnings disclosures. The primary catalyst for the steep declines was the widespread memory chip shortage, which management flagged as a significant constraint on future smartphone production. For Qualcomm, which reported first-quarter fiscal 2026 earnings, revenue of $12.25 billion narrowly missed expectations, while its guidance for the second quarter projected a more measured outlook with revenues between $10.2 billion and $11 billion, reflecting "near-term uncertainty in memory supply and pricing for handset OEMs". The company noted that several original equipment manufacturers (OEMs), particularly in China, are reducing their handset build plans due to these supply constraints.
Arm Holdings similarly faced market skepticism, with its stock dropping approximately 8% in after-hours trading. The company reported a record third quarter with revenue up 26% year-on-year to $1.24 billion, driven by growth in both smartphones and data centers. However, a miss on licensing revenue, which came in slightly below estimates at $505 million, contributed to the pressure. While Arm's royalty revenue from higher-value smartphones is still growing, management acknowledged that lower-generation chip royalties could be affected by memory supply chain constraints. Despite these immediate pressures, phone manufacturers are reportedly prioritizing premium, higher-priced devices, offering a partial offset by bolstering sales of higher-end chips for both Qualcomm and Arm.
Valuations Under Pressure, AI Aspirations Loom
Despite the recent stock weakness, Arm Holdings maintains a high valuation, with a P/E ratio hovering around 134-138 and a market capitalization nearing $111 billion. Its stock has experienced significant volatility over the past year, trading down from a high of $183.16 in October 2025 and showing a 52-week decline of over 30%. Analyst sentiment remains mixed, with a consensus rating of "Moderate Buy" but a significant number of downgrades to "Hold". Price targets suggest potential upside, but the recent earnings call and guidance have tempered enthusiasm, with some analysts cautioning that weak licensing revenue today could impact future royalties.
Qualcomm's stock also saw a significant drop, losing around 11.7% in after-hours trading. The company, with a market capitalization of $157 billion, faces a Zacks Rank #4 (Sell) rating, signaling expected underperformance due to unfavorable earnings estimate revisions. While its first-quarter earnings beat expectations, the cautious forward guidance, attributed to memory supply issues, overshadowed the positive results. Despite current headwinds, both companies are strategically positioning themselves for long-term growth in the burgeoning AI data center market. Arm, in particular, expects its data center business to eventually surpass mobile revenue, with significant triple-digit growth in that segment driven by custom hyperscaler chips.
Sector Dynamics and Future Capacity
The memory chip shortage is a direct consequence of the unprecedented build-out of artificial intelligence infrastructure, which diverts manufacturing capacity away from consumer electronics. Major memory chip makers like Samsung Electronics, SK Hynix, and Micron Technology are prioritizing high-bandwidth memory (HBM) production for AI servers, leaving less supply for components used in smartphones and PCs. This dynamic is projected to persist, with Intel CEO Lip-Bu Tan suggesting shortages could last until 2028. The global semiconductor market is forecast to exceed $1 trillion by 2030, with the memory segment alone expected to reach $127.3 billion by 2026, growing at a 7.5% CAGR, or even over $440 billion with 30% growth in 2026 according to other estimates. The data processing segment, fueled by AI and data centers, is poised to become the largest part of the semiconductor market in 2026. However, expanding manufacturing capacity for memory chips is a lengthy process, with new factories requiring over a year to build and equip. This logistical reality underscores the persistent nature of the current supply constraints, creating a challenging but strategically significant environment for companies like Arm and Qualcomm.