Arm Holdings Faces Market Scrutiny Over Steep Valuation

Arm Holdings ARM has stayed at the center of chip sector discussions in 2025, but its recent market momentum tells a story of mixed sentiment and valuation scrutiny.

Over the past month, ARM shares have slipped nearly 15%, spurring debate among analysts about the sustainability of its high valuation and whether recent weakness is a buying opportunity or a warning sign.

Four earnings downgrades for fiscal 2026 tilt sentiment bearish.

The numbers sharpen that picture. ARM now trades with a price-to-earnings (P/E) ratio above 138 and a forward P/E of nearly 70, significantly outpacing the industry average of around 33. Such a valuation leaves little room for error, especially given increased R&D spend, growing competitive threats from China’s push into RISC-V chips, and potential partnership fallout if ARM expands into CPU manufacturing. Despite long-term dominance in mobile chip design (99% smartphone share) and strong inroads into AI data centers, the consensus now signals caution.

ARM boasts strong gross margins and a solid $2.9 billion cash position. However, in the near term, risks are weighing than the potential upside, making the stock a tricky bet despite its longer-term growth story.

Beyond ARM: NVIDIA and Qualcomm are Better Valued

While ARM’s valuation may prompt caution, investors looking for semiconductor exposure with clearer financial traction might consider NVIDIA NVDA and Qualcomm QCOM. NVIDIA, with a forward 12-month P/E of 35, continues to dominate the AI accelerator space, driven by strong revenue and earnings growth, fueled by surging demand for its GPUs. The company’s leadership in AI infrastructure makes NVIDIA a favorite among growth-oriented investors.

Meanwhile, Qualcomm, trading at just 13x forward earnings, offers a more diversified chip portfolio spanning smartphones, automotive, and IoT. Its solid royalty business and increasing footprint in AI-powered edge devices position Qualcomm for steady expansion. Both NVIDIA and Qualcomm have demonstrated the ability to monetize their innovations more effectively than ARM, making them compelling alternatives.

ARM stock 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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