The stock of Arm Holdings (ARM), a prominent CPU manufacturer for the semiconductor industry, has fallen from its highs but trades at eye-watering multiples. Even under the most optimistic forecasts, Arm Holdings looks expensive, leaving little room for error. I’ve turned bearish on this chip design and licensing company because I believe it’s truly priced for perfection.
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Arm’s Stretched Valuation
Let’s start with the valuation. Arm Holdings’ valuation metrics indicate a significant premium compared to sector medians, and this is the center point for my concerns about the stock. The non-GAAP trailing price-to-earnings (P/E) ratio stands at 86.08x, reflecting a 251.70% premium over the sector median of 24.48x. The forward non-GAAP P/E is similarly high at 82.84x, which is 241.1% above the median.
Regarding GAAP metrics, the trailing P/E is an astonishing 214.66x, or 601.11% higher than the sector median of 30.62x. The forward GAAP P/E of 160.07x is also 454.52% above the sector average. These are mega-valuation multiples.
Of course, P/E ratios must always be contextual, and one of the most important contexts is the growth forecast. However, the non-GAAP forward price-to-earnings-to-growth (PEG) ratio of 2.38 suggests potential overvaluation relative to growth expectations—the sector average is 1.85. The projections suggest that Arm will grow earnings by 34.86% annually over the next three to five years.
Overall, these metrics indicate that Arm’s valuation is significantly stretched and potentially priced for perfection. As such, I’m concerned about the sustainability of the share price and fear that a downside surprise could send the stock tanking.
Arm Is Expensive Even in the Most Optimistic Scenarios
The above data and ratios represent the consensus opinion. However, even in the most optimistic of scenarios, Arm Holdings stock looks expensive. The most optimistic forecast is as follows: EPS in 2025 of $1.61 versus consensus of $1.55; EPS in 2026 of $2.52 versus consensus of $2.05; EPS in 2027 of $3.41 versus consensus of $2.67. So, even under these forecasts, the stock is trading at 40.6x forward earnings for 2027.
Arm’s Possible Catalysts
While I’m bearish on Arm Holdings, it’s important to recognize that several potential catalysts could enhance its growth trajectory above and beyond the consensus. One of the most promising areas is the rise of artificial intelligence (AI) and edge computing, with Arm’s v9 architecture designed to support the increasing demand for AI-ready devices. CEO Rene Haas has projected that by 2025, there could be 100 billion AI-capable Arm devices in circulation.
This tailwind is compounded by an expected recovery in the mobile segment, with analysts forecasting a compound annual growth rate of 35% from FY24 to FY27. This growth will be driven by adopting the v9 architecture in high-performance devices like Apple’s (AAPL) latest and upcoming iPhone models.
Furthermore, as Arm transitions to its v9 architecture, it is expected to command higher royalty rates, potentially doubling revenues compared to the previous v8 architecture. Moreover, strategic partnerships with major tech companies like Nvidia (NVDA) and Microsoft (MSFT) for AI applications and data center solutions will further bolster revenue.
Arm’s Headwinds
However, as indicated by my above valuation analysis, I fear these tailwinds are more than priced in. That leaves Arm Holdings vulnerable to downside risks, and there are many hypothetical scenarios where it may face headwinds.
This includes increasing competition in the semiconductor industry from rivals like Intel (INTC) and AMD (AMD) and new entrants in AI chip design. The ongoing geopolitical tensions, especially between the U.S. and China, could impact global supply chains and market access. Additionally, Arm’s dependence on licensing models may expose it to fluctuations in demand from major customers like Apple, which could affect revenue predictability.
Some analysts have even suggested limited room for future market expansion given strong market shares in certain sectors. Stone Fox Capital said that adoption of the Armv9 is slow after five years in the market, and with more than seven billion chips shipped per quarter, there’s not much room for further volume growth.
In short, with Arm Holdings already trading at these huge multiples, it’s increasingly vulnerable to downside growth shocks. There’s very little room for error.
Is Arm Holdings Stock a Buy According to Analysts?
On TipRanks, ARM is a Moderate Buy based on 14 Buys, four Holds, and one Sell rating assigned by analysts in the past three months. The average ARM stock price target is $154.15, implying a 15.9% upside potential.
The Bottom Line on Arm Holdings
Arm Holdings stock has significant downside risks despite strong AI and edge computing growth potential. Its valuation is stretched, with P/E and PEG ratios far exceeding sector averages, making it vulnerable to any downturns or negative surprises. Even under optimistic earnings projections, the stock remains expensive.
Moreover, Arm’s market expansion could be constrained by the potentially slower adoption of Armv9, increased competition, geopolitical tensions, and reliance on major customers like Apple. While institutional analysts rate Arm as a Moderate Buy, the high valuation leaves little room for error.
