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Arm Holdings Stock Drops 16% in 3 Months: Is Now the Time to Buy?
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Shares of Arm Holdings plc (ARM - Free Report) have seen a significant drop, falling 15.5% over the past three months compared with the 0.6% decline of the broader industry. However, despite this recent decline, Arm's stock has experienced an impressive 69.3% gain year to date, suggesting that the current pullback may just be part of a broader correction.
Image Source: Zacks Investment Research
In its most recent trading session, ARM closed at $127.22, which is 33% lower than its 52-week high of $188.75. Additionally, the stock is now trading below its 50-day moving average, signaling a bearish outlook from investors.
ARM Stock Trades Below 50-Day Average
Image Source: Zacks Investment Research
While market corrections are normal following a large rally, a sharp decline in a short time frame often raises concerns. The recent drop in Arm's stock price can largely be attributed to weak economic data, with rising unemployment and growing fears of an impending recession being key factors.
With ARM shares having fallen significantly, many investors are left questioning whether this is an opportunity to buy into the stock. Let’s dive deeper into what could impact the decision.
ARM’s Strength in AI, Cloud Computing and Smartphones
ARM leverages AI to develop sophisticated chip designs and software tools, which are utilized in smartphones, automobiles and data centers. Leading semiconductor companies like Apple (AAPL - Free Report) , NVIDIA (NVDA - Free Report) and Qualcomm (QCOM - Free Report) rely on ARM’s chip designs. The company provides foundational designs that its clients can further customize and develop.
ARM’s strategic positioning within the AI ecosystem suggests that it has the potential for sustained growth beyond the current AI boom. Its cutting-edge v9 architecture and power-efficient processor platforms have garnered significant attention from major industry players, further strengthening ARM's competitive position in the semiconductor market. Moreover, its inclusion in the Nasdaq-100 Index within a year of its initial public offering highlights its growing importance in the global technology sector.
ARM forecasted around 20% sequential growth in royalty revenues for the fiscal second quarter, anticipating a higher adoption of v9, which typically commands double the royalty rates compared to Armv8 products. Royalty revenues have been boosted by the resurgence of the smartphone market and increased market share outside mobile.
ARM’s Weakness in IoT and Networking Equipment
However, ARM continues to face challenges in the IoT and networking equipment markets, where persistent inventory corrections have led to ongoing weakness. Additionally, fluctuations in the broader semiconductor industry could impact ARM's revenue streams. The company was unable to raise its full-year fiscal 2025 revenue growth rates in its last reported quarter, leaving investors who were hoping for positive news somewhat disappointed.
ARM’s Top and Bottom-Line Prospects Remain Healthy
The Zacks Consensus Estimate for ARM’s fiscal 2025 earnings is pegged at $1.56, indicating 22.8% growth from the year-ago level. Earnings for fiscal 2026 are expected to increase 32.3% from the prior-year actuals. The company’s sales are expected to increase 23.2% and 23.5% year over year, respectively, in fiscal 2025 and 2026.
In the past 60 days, three estimates for fiscal 2025 earnings have been revised upward, with no downward revisions, reflecting strong analyst confidence in the company. For fiscal 2026, two estimates have moved north over the past 60 days versus no southward revisions. This indicates strong confidence among analysts in the company's ability to improve its financial performance soon.
ARM Stock Remains Expensive
Despite the significant decline in the three months, ARM stock is still relatively expensive. It is currently priced at around 71.1 times forward 12-month earnings per share, which is significantly higher than the industry’s average of 33.6 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 144.5 times, far exceeding the industry’s average of 48.9 times.
Should You Wait for A Better Price?
Given ARM's current valuation, there may still be room for the stock price to fall further, even after its recent decline. For investors, it could be wise to wait for a more attractive entry point before buying. While ARM’s strong foothold in the AI hardware market and advancements in chip design suggest long-term growth potential, timing is crucial for maximizing returns. 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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Arm Holdings Stock Drops 16% in 3 Months: Is Now the Time to Buy?
Shares of Arm Holdings plc (ARM - Free Report) have seen a significant drop, falling 15.5% over the past three months compared with the 0.6% decline of the broader industry. However, despite this recent decline, Arm's stock has experienced an impressive 69.3% gain year to date, suggesting that the current pullback may just be part of a broader correction.
In its most recent trading session, ARM closed at $127.22, which is 33% lower than its 52-week high of $188.75. Additionally, the stock is now trading below its 50-day moving average, signaling a bearish outlook from investors.
ARM Stock Trades Below 50-Day Average
Image Source: Zacks Investment Research
While market corrections are normal following a large rally, a sharp decline in a short time frame often raises concerns. The recent drop in Arm's stock price can largely be attributed to weak economic data, with rising unemployment and growing fears of an impending recession being key factors.
With ARM shares having fallen significantly, many investors are left questioning whether this is an opportunity to buy into the stock. Let’s dive deeper into what could impact the decision.
ARM’s Strength in AI, Cloud Computing and Smartphones
ARM leverages AI to develop sophisticated chip designs and software tools, which are utilized in smartphones, automobiles and data centers. Leading semiconductor companies like Apple (AAPL - Free Report) , NVIDIA (NVDA - Free Report) and Qualcomm (QCOM - Free Report) rely on ARM’s chip designs. The company provides foundational designs that its clients can further customize and develop.
ARM’s strategic positioning within the AI ecosystem suggests that it has the potential for sustained growth beyond the current AI boom. Its cutting-edge v9 architecture and power-efficient processor platforms have garnered significant attention from major industry players, further strengthening ARM's competitive position in the semiconductor market. Moreover, its inclusion in the Nasdaq-100 Index within a year of its initial public offering highlights its growing importance in the global technology sector.
ARM forecasted around 20% sequential growth in royalty revenues for the fiscal second quarter, anticipating a higher adoption of v9, which typically commands double the royalty rates compared to Armv8 products. Royalty revenues have been boosted by the resurgence of the smartphone market and increased market share outside mobile.
ARM’s Weakness in IoT and Networking Equipment
However, ARM continues to face challenges in the IoT and networking equipment markets, where persistent inventory corrections have led to ongoing weakness. Additionally, fluctuations in the broader semiconductor industry could impact ARM's revenue streams. The company was unable to raise its full-year fiscal 2025 revenue growth rates in its last reported quarter, leaving investors who were hoping for positive news somewhat disappointed.
ARM’s Top and Bottom-Line Prospects Remain Healthy
The Zacks Consensus Estimate for ARM’s fiscal 2025 earnings is pegged at $1.56, indicating 22.8% growth from the year-ago level. Earnings for fiscal 2026 are expected to increase 32.3% from the prior-year actuals. The company’s sales are expected to increase 23.2% and 23.5% year over year, respectively, in fiscal 2025 and 2026.
In the past 60 days, three estimates for fiscal 2025 earnings have been revised upward, with no downward revisions, reflecting strong analyst confidence in the company. For fiscal 2026, two estimates have moved north over the past 60 days versus no southward revisions. This indicates strong confidence among analysts in the company's ability to improve its financial performance soon.
ARM Stock Remains Expensive
Despite the significant decline in the three months, ARM stock is still relatively expensive. It is currently priced at around 71.1 times forward 12-month earnings per share, which is significantly higher than the industry’s average of 33.6 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 144.5 times, far exceeding the industry’s average of 48.9 times.
Should You Wait for A Better Price?
Given ARM's current valuation, there may still be room for the stock price to fall further, even after its recent decline. For investors, it could be wise to wait for a more attractive entry point before buying. While ARM’s strong foothold in the AI hardware market and advancements in chip design suggest long-term growth potential, timing is crucial for maximizing returns. ARM currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.