Arm Holdings plc (ARM) has faced a significant decline, with shares dropping 21.8% in the past three months. In comparison, the industry and Zacks S&P 500 Composite fell by 14.4% and 7.8%, respectively.

Arm Holdings Faces Challenges Amid Market Declines

Three-Month Price Performance

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Amid this downturn, investors may question if now is the right moment to invest in ARM stock. Let’s evaluate the situation.

Expansion in Server Market Benefits Arm Holdings

Arm Holdings is actively increasing its presence in the server market. Major companies like NVIDIA (NVDA) and Microsoft (MSFT) are rapidly adopting Arm-based architectures. NVIDIA is leveraging Arm9 for its Grace Blackwell super chip, while Microsoft plans to enhance its Arm-based data center chips. As per management insights, nearly 50% of new server chips dispatched to key hyperscalers in 2025 will be Arm-based, marking a 15% increase from 2024. This growth showcases ARM’s technology gaining traction in a critical sector, with robust support from industry leaders.

Arm Holdings’ Business Model: A Foundation for Growth

The core of Arm Holdings’ business model revolves around licensing chip designs and generating royalties. This strategy allows the firm to ensure a stable revenue stream while minimizing capital expenditures. Their productive structure, complemented by strategic partnerships, secures ARM’s footprint in essential growth areas such as automotive, data centers, and smart devices. A notable financial position—stemming from a successful IPO—presents a strong cash reserve of $2.7 billion and zero debt. These factors equip Arm Holdings to invest in research and development, pursue acquisitions, and expand into new markets, creating a substantial edge over competitors.

Arm Holdings’ Strong Liquidity Position

ARM boasts a strong liquidity position, underpinned by consistent cash growth and minimal short-term debt. During the fourth quarter of fiscal 2025, the current ratio reached 5.2, a 4.8% increase from the previous quarter and nearly double that of the year-ago figure. This ratio exceeds the industry average of 1.38, further reinforcing ARM’s liquidity strength.

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Strong Top-Line Prospects, Weak Bottom-Line Forecast

The Zacks Consensus Estimate predicts ARM’s revenues for the first quarter of fiscal 2026 will reach $1.1 billion, indicating an 11.8% increase from the previous year.

Image Source: Zacks Investment Research

Conversely, the earnings consensus is set at 39 cents per share, representing a decline of 2.5% compared with the same quarter last year.

Image Source: Zacks Investment Research

Tariff Uncertainties Could Impact U.S. Demand for ARM

Arm Holdings reported that around 10-20% of its royalty revenues are derived from U.S. shipments. The ongoing tariff issues may raise the costs of imported chips, potentially reducing demand within the U.S. This economic instability could make imported devices more expensive than domestic options, affecting ARM’s competitive posture. Reduced sales of Arm-based products may diminish royalty revenues. We foresee that this situation could hinder ARM’s licensing business and delay new product development.

Current Valuation of ARM Stock Appears High

Currently, ARM stock is deemed expensive, trading at approximately 61.13 times forward 12-month earnings per share, well above the industry average of 26.62 times. Furthermore, the trailing 12-month EV-to-EBITDA ratio stands at about 95.34 times, significantly higher than the industry average of 16.4 times.

Recommendation: Exercise Caution with ARM Stock

Despite Arm Holdings’ expansion into the server market—supported by major players like NVIDIA and Microsoft—investors should proceed with caution due to the stock’s current high valuation. Although the company’s diverse business model and solid financial standing indicate potential for future growth, its lofty valuation raises concerns about possible declines in stock price. Thus, it is advisable for investors to avoid purchasing ARM stock for now and wait for a more favorable entry point.

ARM currently has a Zacks Rank of #3 (Hold).

Disclaimer

The views and opinions expressed herein are those of the author and may not reflect those of Nasdaq, Inc.