ARM Stock Down 20% in a Year vs Industry Gains: Buy Signal or Caution?

Arm Holdings plc ARM shares have fallen 20% over the past year against an industry that advanced 38% during the same period. This noticeable gap should have put the stock under a spotlight, prompting you to reassess its near- and long-term prospects.

The key issue now is whether the weakness reflects deeper structural concerns or a temporary disconnect from Arm Holdings’ underlying fundamentals. Determining if the stock has further downside or is setting up for a meaningful recovery requires a closer look at the company’s positioning, strategic direction and the broader trends shaping its end markets.

Energy-Efficient AI at the Core of Arm’s Strategy

Arm Holdings has evolved far beyond its roots as a traditional chip designer. Today, it sits at the heart of energy-efficient AI computing, enabling intelligence to scale seamlessly from edge devices to cloud data centers. Its RISC-based architecture delivers superior performance per watt, a critical advantage as AI adoption accelerates under tight power constraints. ARM’s Neoverse V-Series CPUs are increasingly shaping modern AI infrastructure by supporting faster inference and more efficient machine-learning workloads without the excessive energy costs associated with legacy architectures.

A key differentiator is architectural consistency. A unified instruction set across mobile, cloud and edge environments allows developers to deploy AI applications with minimal friction, creating long-term strategic leverage. Partnerships, such as the one with Meta, underscore ARM’s growing relevance in data-center efficiency, while the addition of seasoned leadership from Amazon reflects a deeper push into advanced chipset innovation. Looking ahead, the planned AI chip division signals a shift toward becoming a strategic infrastructure provider rather than just a licensor, potentially strengthening Arm Holdings’ influence over AI performance economics and reinforcing its competitive moat.

A Self-Reinforcing Ecosystem Advantage

ARM’s durability stems from a powerful dual-sided network effect connecting software developers and hardware manufacturers. Device makers favor Arm Holdings’ architecture because it already supports a vast and mature software ecosystem spanning Android, iOS, Windows and Linux. This compatibility reduces integration risk and accelerates time to market, making Arm-based designs the logical choice for global hardware partners.

Developers, in turn, are drawn to Arm because applications built on its architecture gain immediate access to an enormous installed base of devices. Each new hardware adoption expands this reach further, reinforcing a virtuous cycle in which developers and manufacturers continuously attract one another. Over time, this flywheel has created a formidable barrier to entry. With its intellectual property embedded in nearly every smartphone worldwide, ARM commands unparalleled scale in mobile CPU architecture, a position that remains difficult for competitors to dislodge.

NVIDIA NVDA competes with ARM in edge computing and AI-driven device workloads. NVIDIA benefits from its own ecosystem, but lacks ARM’s mobile reach. Even where NVIDIA pushes into low-power processors, the breadth of ARM compatibility limits its ability to displace existing standards. Qualcomm QCOM remains one of ARM’s most essential partners, yet also a peer, because Qualcomm builds mobile chips around ARM cores. The company depends heavily on ARM’s architecture, and its success in smartphones reinforces ARM’s position. Yet Qualcomm continues investing in custom designs to diversify, although ARM’s scale still keeps Qualcomm aligned with the platform.

Strong Earnings and Revenue Growth Outlook

Arm Holdings is positioned for solid earnings and revenue momentum over the next few years. The Zacks Consensus Estimate projects fiscal 2026 earnings at $1.72, representing about 5.5% growth from the prior year. Growth is expected to accelerate meaningfully in fiscal 2027, with earnings forecast to jump nearly 30% year over year. On the top line, ARM’s revenue outlook remains equally strong, with sales projected to rise more than 21% in both fiscal 2026 and 2027. This combination of steady near-term growth and sharp acceleration ahead highlights improving operating leverage and strengthening demand across Arm Holdings’ core markets.

ARM’s Valuation Remains Stretched

ARM’s valuation continues to look demanding. The stock trades at roughly 55 times forward 12-month earnings, a clear premium compared with the industry average of about 34 times. Further, with Arm Holdings’ trailing EV-to-EBITDA multiple hovering near 93 times, far above the industry norm of around 25 times. Such elevated multiples suggest that a large portion of future growth is already priced in, leaving limited room for error. As a result, even solid execution may not prevent near-term volatility or valuation-driven pullbacks.

Hold: Quality Business, Timing Still Matters

Arm Holdings remains a high-quality, strategically critical company with deep exposure to long-term AI and computing trends. Investors who already own the stock should continue to hold, as Arm’s ecosystem strength and architectural relevance support its long-term outlook. However, the current valuation leaves little margin for error and could cap near-term returns. For investors without a position, this is not an ideal entry point. It makes more sense to stay on the sidelines and wait. A better risk-reward setup may emerge if the stock consolidates or corrects further. This approach balances conviction with discipline.

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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