Is ARM's 22% Plummet Over a Year Offering a Fair Price for the Stock?

Arm Holdings plc ARM stock has declined significantly over the past year. Shares have declined 22% against the industry’s 4.3% growth.

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: Power-Efficient Design Anchors Mobile Dominance

ARM’s core strength in power-efficient chip architecture remains central to its leadership in mobile computing. Its designs power sleek, energy-saving devices from Apple AAPL, Qualcomm QCOM, and Samsung, making ARM the foundation of today’s mobile innovation. As demand for performance on minimal power rises, Arm Holdings’ chips continue to dominate smartphones and tablets.

Apple leverages ARM’s architecture for its M-series chips, while Qualcomm depends on it to power its Snapdragon lineup. Samsung integrates ARM designs across mobile and consumer electronics, further affirming its critical role. ARM’s proven ability to balance high efficiency and low power draw has solidified its status in the mobile era.

ARM: AI and IoT Push Gains Momentum

ARM is rapidly emerging as a foundational player in the age of artificial intelligence (AI) and the Internet of Things (IoT). As Apple, Qualcomm and Samsung pursue AI-driven innovation, they increasingly rely on ARM’s flexible, energy-efficient architecture. AI models are being embedded into everything from wearables to cloud data centers, and ARM’s chips are built to meet these growing demands.

Apple continues to scale its AI integration on ARM-based silicon, Qualcomm expands its AI capabilities in mobile and automotive, and Samsung explores next-gen IoT through Exynos chips powered by ARM. With machine learning and edge computing at the forefront, ARM is becoming an indispensable infrastructure for the next wave of tech advancement.

ARM: China Exposure Threatens Growth Outlook

ARM faces notable risks due to its significant exposure to China, its second-largest market. Growth in the region has been sluggish, and one potential reason is the rising adoption of RISC-V, an open-source chip architecture increasingly favored by Chinese firms. This trend may soon accelerate, as the Chinese government is preparing to issue formal guidelines aimed at promoting the development and widespread use of RISC-V technology. Such state-backed support could further weaken ARM’s position in the Chinese semiconductor ecosystem over the coming years.

Given China's strategic focus on reducing dependence on foreign chip architectures, Arm’s reliance on this market presents a long-term concern. If RISC-V adoption continues to gain traction, Arm Holdings’ growth prospects in China could remain muted, affecting its broader global momentum. These evolving competitive dynamic highlights a key vulnerability in Arm’s business model that investors should closely monitor.

ARM: CPU Ambitions May Alienate Clients

ARM’s potential move into producing its own CPUs presents both opportunity and risk. On one hand, entering the hardware space could significantly expand its total addressable market and drive revenue growth. However, this strategy could also backfire by turning Arm Holdings into a direct competitor to its top customers, potentially straining key relationships.

The risk is heightened by reports that the company is hiring talent away from these same clients, which may further fuel tensions. While the hardware push offers upside, it could alienate partners and jeopardize existing licensing revenues from major chipmakers. At the same time, ARM’s move to develop its CPUs could significantly compress its gross margins, as the company would begin absorbing the direct costs associated with chip manufacturing.

ARM: Earnings Estimates Signal Near-Term Pressure

ARM may face near-term headwinds as analyst sentiment turns cautious. Over the past 60 days, five downward revisions have been made to its first-quarter fiscal 2025 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 15% during this period, signaling potential softness in revenue 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.

ARM's Valuation Remains Significantly Elevated

ARM stock is currently expensive. It is priced at around 73.36 times forward 12-month earnings per share, significantly higher than the industry’s average of 30.64 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 103.73 times, far exceeding the industry’s average of 19.24 times.

ARM’s Risks Outweigh Upside Potential

ARM may no longer justify investor confidence despite its leadership in power-efficient chip architecture and rising relevance in AI and IoT. The company faces multiple headwinds, from weakening growth in China due to increasing adoption of rival technologies like RISC-V, to potential fallout with top clients as it pushes into CPU manufacturing. This shift could hurt existing partnerships and pressure margins. Analyst sentiment has also turned negative, with multiple downward revisions to earnings estimates. Coupled with an overstretched valuation compared to peers, these factors suggest limited upside. Investors may want to exit positions before challenges deepen further.

ARM currently carries a Zacks Rank #4 (Sell). 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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