ARM Stock Declines 10% in a Month: Buy or Wait for Further Fall?

Arm Holdings plc ARM stock has declined significantly over the past month. Its shares have declined 10%, in line with the industry.

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Considering the current weakness of ARM shares, investors may wonder if now is the right time to invest in the stock. Let’s delve deeper.

ARM's Stronghold in Mobile and AI

Arm Holdings has a dominant presence in the semiconductor industry, particularly in mobile devices. The company’s low-power architecture, especially in smartphones and tablets, has been a staple for decades. With the increasing proliferation of mobile computing, it remains at the forefront of supplying technology to leading manufacturers like Apple AAPL, Samsung and Qualcomm QCOM. This stable demand serves as a core strength.

As AI and the Internet of Things (IoT) grow, Arm Holdings is uniquely positioned to benefit from these technological trends. ARM-powered chips are being integrated into smart devices, autonomous systems and data centers, capitalizing on AI’s computational needs. With the surge in AI workloads and IoT devices requiring efficient, scalable and low-power processing solutions, ARM’s architecture plays a vital role. The company’s focus on adapting its designs for AI-centric operations adds significant growth potential.

ARM's Licensing Model and Financial Strength

A distinctive aspect of Arm Holdings’ business model is its licensing and royalty structure. ARM licenses its chip designs to major technology companies and earns royalties on every chip sold. This model provides a steady stream of revenues without significant capital expenditure. Furthermore, partnerships with key industry players allow the company to maintain relevance, ensuring it remains a preferred choice in sectors like automotive, data centers and smart devices.

Arm Holdings’ IPO brought in a significant influx of capital, strengthening its balance sheet. As of Dec. 31, the company held $2.7 billion in cash and had no debt. With a healthy cash reserve, it is better positioned to fund its research and development initiatives, pursue strategic acquisitions and expand its market presence. This financial flexibility also places the company in a stronger competitive position, enabling it to weather market fluctuations and invest in future growth opportunities.

ARM’s Strong Guidance

Arm provided guidance for the fourth quarter of fiscal 2025, anticipating revenues between $1.175 billion and $1.275 billion, with the midpoint reflecting a 32% year-over-year increase. The company expects adjusted EPS to range from 48 cents to 56 cents, representing 44% growth at the midpoint compared to the prior year’s 36 cents. While the third-quarter fiscal 2025 results were solid, we believe the strong fourth-quarter guidance should reassure investors that AI-driven growth is progressively materializing in the financials.

The Zacks Consensus Estimate for ARM’s fiscal 2025 earnings is pegged at $1.62, indicating 27.6% growth from the year-ago level. Earnings for fiscal 2026 are expected to increase 23.5% from the prior-year actuals.

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The company’s sales are expected to rise 23.5% and 23.3% year over year, respectively, in fiscal 2025 and 2026.

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ARM's Valuation Remains Significantly Elevated

ARM stock is currently expensive. It is priced at around 62.7 times forward 12-month earnings per share, significantly higher than the industry’s average of 25.5 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 252.8 times, far exceeding the industry’s average of 17.4 times.

Wait for a Better Price

Arm Holdings remains a strong player in the semiconductor industry, driven by its dominant architecture and exposure to AI and IoT markets. The company's robust licensing model and strong financials post-IPO provide a solid foundation for future growth.

However, timing the entry is crucial for maximizing returns. Given ARM's current valuation, there may be room for the stock to fall. Investors should wait for a more attractive entry point before buying the stock.

ARM currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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