Arm Holdings stock tumbled after the company unveiled its ambitious plan to enter the market for data-center chips. But shares later reversed course and headed for their best day in nearly a year. What happened?

Arm on Tuesday revealed its first-ever data center CPU, developed in close collaboration with Meta Platforms and an ASIC design partner. The chip already has entered the customer sampling process, with production slated for later this year.

It's a bold move for Arm, seeing as it puts the company in direct competition with its customers, namely Nvidia, Amazon, Alphabet, and Microsoft. Meta, OpenAI, and smaller players like Cloudflare have pledged to be among the first to deploy the chip, dubbed the Arm AGI CPU.

Shares initially fell following the announcement, but bounced back shortly after Tuesday's closing bell once CEO Rene Haas outlined aggressive sales targets for the coming years. The stock was up 17% on Wednesday, and was on pace for its highest close since November 2025, according to Dow Jones Market Data.

The company expects its new chip business to generate $15 billion in sales in five years, up from roughly $1 billion in fiscal 2028. At the same time, the IP business will continue to grow and record sales of $10 billion, Haas said.

Arm is targeting $25 billion in total sales within five years, or five times the level generated by its existing business, which centers on licensing intellectual property. Analysts expect the company to log about $4.9 billion in sales for its latest fiscal year, which ends this month.

For decades, Arm served only as a blueprint maker, licensing intellectual property to manufacturers in return for small royalties from chip sales. Today, just about every smartphone, tablet, and Apple computer run on top of Arm designs.

Around 2023, Arm began bundling CPUs, GPUs, and interconnects into a validated package -- an attractive proposition for tech companies, saving them years of engineering time, and a positive for Arm, commanding higher royalty rates. These compute subsystems now account for roughly a quarter of Arm's total royalties.

The company's entry into chip sales is even more consequential, as it "marks a significant expansion of its business model," in the words of J.P. Morgan analysts. The firm believes Arm is facing a $100 billion serviceable available market opportunity by 2030, "positioning Arm as a foundational player from edge to cloud in the AI era."

J.P. Morgan sees other opportunities on the horizon. While Arm is planning to address the CPU portion of the data-center market, the company could expand into the broader "XPU market," a catchall term for new or specialized processing units.

Other analysts viewed the development just as constructively. KeyBanc Capital Markets analyst John Vinh described the development as "significantly incremental" to Arm's existing total addressable market, "with limited customer channel conflicts."

Arm itself has said the chip business won't displace its legacy IP business, which indicates that "much of the investment is already in the current model," Vinh wrote. Still, management conceded that some customers might switch to buying finished chips outright.

On the topic of displacement: Arm's CPUs will be competing with existing products on the market, including those from customers like Intel and Advanced Micro Devices. Those CPUs are based around different intellectual property called x86.

Haas himself downplayed the prospect of a market rivalry. "We think there's room for lots of different players, so we're not really too worried about that," the CEO said.

Previously used only in low-power devices, Amazon Web Services introduced Arm into the data center with its first Graviton CPU chip in 2018. Microsoft has its Cobalt Arm chip in the Azure cloud, and Google Cloud has the custom Axion CPU. Nvidia's Grace and Vera Arm-based CPUs populate its industry-leading artificial-intelligence servers.

The latest shift may anger customers, but there may be little alternative, considering x86 licenses from Intel and AMD are not forthcoming and the open-source RISC-V chip architecture may not be mature enough.

There's also the question of which companies will buy Arm's AGI CPU when the largest players -- such as AWS, Microsoft's Azure, and Alphabet's Google -- already have their own CPUs.

As much as the cloud has taken over computing, there's still a lot happening on corporate servers, which are either IBM mainframes or x86 servers running Intel or AMD hardware. Key back-end software from companies like SAP and Oracle run on these systems, and replacing these x86 servers could be a place where Arm AGI CPU could find success.

If it does, that could even work to the advantage of the cloud providers. One of Arm's strengths is the army of mobile and PC software developers that has grown up since iPhone debuted in 2007 with an Arm chip. But Arm is less prevalent in enterprise software and a wave of corporations migrating their on-premises x86 servers to Arm AGI could remedy that. In doing so, it would benefit the entire Arm ecosystem, including the cloud providers.