ARM's 11% Rise in Three Months: Should You Buy, Hold, or Sell?

Shares of Arm Holdings plc ARM have risen by 11% over the last three months, yet this growth trails the semiconductor industry’s robust 20% growth. This underperformance questions the stock’s near-term prospects. Let’s explore the key factors driving and holding back ARM’s performance.

Mobile Market Leadership: Power-Efficient Chip Innovation

ARM’s strength lies in its power-efficient chip architectures, which remain essential to its leadership in mobile computing. Its designs power energy-saving devices from Apple AAPL, Qualcomm QCOM and Samsung, establishing ARM as the backbone of modern mobile technology. As demand for high performance with low power consumption rises, ARM’s chips continue to dominate smartphones and tablets. Apple builds its M-series chips around the company’s architecture, Qualcomm relies on it for Snapdragon processors, and Samsung integrates ARM designs across mobile and consumer electronics. ARM’s ability to combine efficiency and performance remains a core competitive advantage.

Positioned for Growth: The AI and IoT Frontier

ARM is fast becoming a key player in the AI and IoT space. As industry leaders like Apple, Qualcomm, and Samsung focus on AI-driven innovation, they increasingly depend on ARM’s flexible, energy-efficient architecture. From wearables to cloud data centers, ARM’s chips are designed to handle the rising need for embedded AI models. Apple is expanding AI features on ARM-based silicon, Qualcomm is enhancing AI capabilities in mobile and automotive applications, and Samsung is exploring advanced IoT solutions through ARM-powered Exynos chips. With machine learning and edge computing shaping the future, ARM’s architecture is emerging as vital infrastructure for technological progress.

China Exposure: RISC-V Gains Momentum

ARM faces significant risks from its large presence in China, its second-largest market. Growth in the region has slowed, driven in part by the growing adoption of RISC-V, an open-source chip architecture increasingly embraced by Chinese companies. The Chinese government is expected to release formal guidelines promoting RISC-V development, potentially accelerating this shift. As China seeks to reduce its reliance on foreign chip technologies, ARM’s dependence on this market becomes a long-term challenge. Continued RISC-V adoption could limit ARM’s growth in China, weakening its overall global momentum. This evolving competitive threat is a crucial factor for investors to closely monitor.

Cautious Outlook: Earnings Revisions Suggest Growing Pressure

ARM may face near-term headwinds as analyst sentiment turns cautious. Over the past 60 days, four downward revisions have been made to its fiscal 2026 earnings estimates, with no upward adjustments. This trend reflects growing concern over the company's ability to meet prior expectations amid evolving industry dynamics.

Notably, the Zacks Consensus Estimate for earnings has dropped by 2% during this period, signaling potential softness in revenues or margin performance. Such cuts can weigh on investor confidence and may lead to increased volatility in the stock until visibility around growth drivers improves.

Valuation Concerns: ARM Trades at a Premium to Peers

ARM stock is currently expensive. It is priced at around 79.61 times forward 12-month earnings per share, significantly higher than the industry’s average of 39.63 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 124.33 times, far exceeding the industry’s average of 22.32 times.

Hold ARM Stock for Now

ARM has shown moderate gains recently but continues to lag behind the broader semiconductor industry. Its leadership in power-efficient chip designs for mobile, AI, and IoT applications remains a solid long-term advantage. However, rising competition from RISC-V in China poses a significant risk, which could potentially impact future growth. Coupled with cautious analyst sentiment and a premium valuation, the stock appears overvalued. Investors should hold ARM for now, awaiting clearer growth visibility before considering further exposure.

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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