Arm Holdings (ARM) shareholders have endured a wild ride since its September 2023 listing. The CPU manufacturer has doubled since its IPO price. However, this masks considerable volatility and intangible risks as investors grapple with the company’s premium valuation and moat within the chip space. While I wish I had bought during earlier dips, I’m bearish at the current price. Even strong earnings growth cannot justify the valuation of this stock.
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Strong Q4 Not Enough For ARM Stock
Arm Holdings delivered objectively impressive Q4 2024 results earlier this month, with revenue climbing 19% YoY to $983 million, driven by record royalty income and licensing growth. The surge reflects increased adoption of Armv9 architecture in MediaTek’s Dimensity 9400 chips and hyperscaler deployments like AWS Graviton and Google Axion. However, this impressive headline data arguably isn’t enough, and that’s simply because of the valuation metrics in question. Moreover, looking deeper, some cracks appear to be emerging beneath the surface.
For example, Armv9—the latest architecture that commands higher royalties—adoption has plateaued at 25% of royalty revenue for three consecutive quarters, suggesting muted enthusiasm from major clients like Qualcomm (QCOM), which continues using Armv8-based Nuvia CPUs.
We also saw annualized contract value (ACV) grow by 9% year-on-year, which was a little lower than the recent run rate of low teens. This could be the start of a concerning trend. What’s more, Huawei has experienced strong growth on the back of its own chip architecture and operating systems, potentially paving the way for others to do the same.
While management frames this as a “runway for future growth,” analysts warn that 40% of smartphone royalty growth stems from one-time CSS adoptions, creating challenging comparisons for future quarters. With guidance projecting royalty declines next quarter due to smartphone seasonality and IoT softness, Arm’s ability to sustain 20%+ growth is looking increasingly less likely.
Industry Headwinds Threaten Arm’s Sustainability
Arm’s core market, smartphones, is currently undergoing challenging times. Global smartphone sales remain 19% below 2017 peaks, while secondhand devices now comprise 22% of the market – up from 4% in 2014 – directly reducing demand for premium Armv9 chips. Competitors like Huawei circumvent Arm entirely through Kirin chips and HarmonyOS, capturing 15% of China’s Q1 2025 smartphone shipments. Given China’s recent technological successes, it wouldn’t be surprising to see this representing the start of a significant breakthrough.
Furthermore, while Arm maintains a 60% share in mobile processors, market saturation, secondary device proliferation, and customer backward-compatibility strategies create durable revenue headwinds that current growth rates fail to reflect.
Arm is Severely Overvalued
Ultimately, my bearishness centers around ARM’s valuation. At 99.2x forward non-GAAP price-to-earnings (P/E)—285% above sector median—and a 3.24 price-to-earnings-to-growth (PEG) ratio—76% higher than peers, the stock prices are in perpetual hypergrowth despite consensus forecasts for deceleration. Even optimistic 2028 estimates project a 57.1x P/E, above the current forward P/E for the semiconductor sector. This premium persists despite automotive licensing revenue plunging 40% YoY and China contributing 25% of royalties amid geopolitical risks.
With one intrinsic value model aligning Arm’s fair value between $2.79-6.66 versus its $160 market price, the disconnect between valuation and execution capabilities appears untenable. Unless Armv9 adoption accelerates dramatically, current pricing assumes flawless execution across multiple challenged markets.
Nonetheless, investors should recognize that ARM demonstrates exceptional operational quality, boasting industry-leading margins that underscore its asset-light model. The company maintains a staggering 95%+ gross margin, far exceeding semiconductor peers through its IP licensing focus that avoids manufacturing costs. This efficiency fuels R&D for AI-optimized architectures like Armv9, sustaining dominance in mobile while expanding into the automotive and cloud sectors.
Moreover, Arm’s moat stems from entrenched architecture adoption across 99% of smartphones creating prohibitive switching costs as clients invest deeply in its ecosystem. Its vast IP portfolio (287 billion chips shipped) and energy-efficient designs drive recurring royalties while creating some barriers to entry.
Is ARM Stock a Buy, Hold, or a Sell?
On Wall Street, ARM stock carries a Moderate Buy consensus rating based on 17 Buy, four Hold, and one Sell ratings over the past three months. ARM’s average price target of $179 per share implies approximately 24% upside potential over the next twelve months.
A Quality Company at an Unjustifiable Price
At current prices, I’m a bearish on ARM stock. While the company delivered strong earnings and offers superb operational metrics, its valuation remains disconnected from core fundamentals with a near-100x forward P/E pricing in perpetual hypergrowth. Smartphone-market headwinds, rising competition from Huawei, and plateauing Armv9 adoption present a clear and present danger to ARM in 2025.
Even with industry-leading margins and a strong moat, execution must be near flawless to justify its premium. Unless revenue growth accelerates dramatically, the downside risk outweighs the potential reward of owning ARM stock.
