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Arm Holdings Stock Dips 19% in 3 Months: Is This a Buying Opportunity?
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Shares of Arm Holdings plc (ARM - Free Report) have experienced a notable decline, dropping 19.1% in the past three months, while the broader industry has risen 5.1%.
In the most recent trading session, ARM closed at $136.08, which is 28% below its 52-week high of $188.75. Despite this recent dip, ARM's stock has still surged an impressive 81% year to date, indicating that the current downturn may be part of a market correction.
With this recent drop in ARM's share price, many investors are wondering if this presents a buying opportunity. Let’s explore the factors that could influence this decision.
Image Source: Zacks Investment Research
ARM’s Strong Position in the Semiconductor Industry
Arm Holdings has a dominant presence in the semiconductor industry, particularly in mobile devices. The company’s low-power architecture, especially in smartphones and tablets, has been a staple for decades. With the increasing proliferation of mobile computing, the company remains at the forefront of supplying technology to leading manufacturers like Apple (AAPL - Free Report) , Samsung, and Qualcomm (QCOM - Free Report) . This stable demand serves as a core strength.
As AI and the Internet of Things (IoT) continue to grow, Arm Holdings is uniquely positioned to benefit from these technological trends. Arm-based chips are being integrated into smart devices, autonomous systems, and data centers, capitalizing on AI’s computational needs. With the surge in AI workloads and IoT devices requiring efficient, scalable, and low-power processing solutions, Arm’s architecture plays a vital role. The company’s focus on adapting its designs for AI-centric operations adds significant growth potential.
A distinctive aspect of Arm Holdings’ business model is its licensing and royalty structure. ARM licenses its chip designs to major technology companies and earns royalties on every chip sold. This model provides a steady stream of revenue without the need for significant capital expenditure. Furthermore, partnerships with key industry players allow the company to maintain relevance, ensuring that it remains a preferred choice in sectors like automotive, data centers, and smart devices.
Arm Holdings’ recent IPO brought in a significant influx of capital, strengthening its balance sheet. As of June 30, the company held $2.5 billion in cash and had no debt. With increased cash reserves, it is better positioned to fund its research and development (R&D) initiatives, pursue strategic acquisitions, and expand its market presence. This financial flexibility also places Arm Holdings in a stronger competitive position, enabling it to weather market fluctuations and invest in future growth opportunities.
Post-IPO Volatility
Since its IPO, ARM’s stock has experienced significant volatility. While the influx of capital has strengthened its financial position, the company’s valuation remains subject to market sentiment. This uncertainty, coupled with global economic conditions and the cyclicality of the semiconductor industry, makes Arm Holdings’ stock potentially risky in the short term. Investors need to be cautious about near-term fluctuations as the market adjusts to its public status.
Geopolitical Risks
While Arm Holdings benefits from geopolitical trends in some respects, it also faces risks. The ongoing trade tensions between the United States and China pose challenges for the semiconductor industry as a whole. China is a critical market for ARM, especially for mobile and IoT devices. Any significant deterioration in relations between China and the West could result in reduced sales or additional regulatory hurdles for the company. Furthermore, restrictions on exporting advanced technologies could hamper its ability to capitalize on opportunities in Chinese markets.
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 33.2% from the prior-year actuals. The company’s sales are expected to increase 23.2% and 24.2% year over year, respectively, in fiscal 2025 and 2026.
Image Source: Zacks Investment Research
Downward Estimate Revisions
Analysts have become more pessimistic about Arm Holdings' earnings outlook, with two downward revisions for fiscal 2025 and one for fiscal 2026, while there have been no upward revisions during the same period, signaling potential concern over future performance.
Image Source: Zacks Investment Research
ARM Stock Remains Expensive
Despite the significant decline in the three months, ARM stock is still relatively expensive. It is currently priced at around 78.5 times forward 12-month earnings per share, which is significantly higher than the industry’s average of 35.2 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 162.8 times, far exceeding the industry’s average of 52.9 times.
Wait for A Better Price
Despite recent volatility, Arm Holdings remains a strong player in the semiconductor industry, driven by its dominant architecture and exposure to AI and IoT markets. The company's robust licensing model and strong financials post-IPO provide a solid foundation for future growth.
However, timing the entry is crucial for maximizing returns. Given ARM's current valuation, there may still be room for the stock to fall further, even after its recent decline. For investors, it could be wise to wait for a more attractive entry point before buying.
Image: Bigstock
Arm Holdings Stock Dips 19% in 3 Months: Is This a Buying Opportunity?
Shares of Arm Holdings plc (ARM - Free Report) have experienced a notable decline, dropping 19.1% in the past three months, while the broader industry has risen 5.1%.
In the most recent trading session, ARM closed at $136.08, which is 28% below its 52-week high of $188.75. Despite this recent dip, ARM's stock has still surged an impressive 81% year to date, indicating that the current downturn may be part of a market correction.
With this recent drop in ARM's share price, many investors are wondering if this presents a buying opportunity. Let’s explore the factors that could influence this decision.
ARM’s Strong Position in the Semiconductor Industry
Arm Holdings has a dominant presence in the semiconductor industry, particularly in mobile devices. The company’s low-power architecture, especially in smartphones and tablets, has been a staple for decades. With the increasing proliferation of mobile computing, the company remains at the forefront of supplying technology to leading manufacturers like Apple (AAPL - Free Report) , Samsung, and Qualcomm (QCOM - Free Report) . This stable demand serves as a core strength.
As AI and the Internet of Things (IoT) continue to grow, Arm Holdings is uniquely positioned to benefit from these technological trends. Arm-based chips are being integrated into smart devices, autonomous systems, and data centers, capitalizing on AI’s computational needs. With the surge in AI workloads and IoT devices requiring efficient, scalable, and low-power processing solutions, Arm’s architecture plays a vital role. The company’s focus on adapting its designs for AI-centric operations adds significant growth potential.
ARM’s Strategic Partnerships, Licensing Model, Cash Reserves
A distinctive aspect of Arm Holdings’ business model is its licensing and royalty structure. ARM licenses its chip designs to major technology companies and earns royalties on every chip sold. This model provides a steady stream of revenue without the need for significant capital expenditure. Furthermore, partnerships with key industry players allow the company to maintain relevance, ensuring that it remains a preferred choice in sectors like automotive, data centers, and smart devices.
Arm Holdings’ recent IPO brought in a significant influx of capital, strengthening its balance sheet. As of June 30, the company held $2.5 billion in cash and had no debt. With increased cash reserves, it is better positioned to fund its research and development (R&D) initiatives, pursue strategic acquisitions, and expand its market presence. This financial flexibility also places Arm Holdings in a stronger competitive position, enabling it to weather market fluctuations and invest in future growth opportunities.
Post-IPO Volatility
Since its IPO, ARM’s stock has experienced significant volatility. While the influx of capital has strengthened its financial position, the company’s valuation remains subject to market sentiment. This uncertainty, coupled with global economic conditions and the cyclicality of the semiconductor industry, makes Arm Holdings’ stock potentially risky in the short term. Investors need to be cautious about near-term fluctuations as the market adjusts to its public status.
Geopolitical Risks
While Arm Holdings benefits from geopolitical trends in some respects, it also faces risks. The ongoing trade tensions between the United States and China pose challenges for the semiconductor industry as a whole. China is a critical market for ARM, especially for mobile and IoT devices. Any significant deterioration in relations between China and the West could result in reduced sales or additional regulatory hurdles for the company. Furthermore, restrictions on exporting advanced technologies could hamper its ability to capitalize on opportunities in Chinese markets.
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 33.2% from the prior-year actuals. The company’s sales are expected to increase 23.2% and 24.2% year over year, respectively, in fiscal 2025 and 2026.
Downward Estimate Revisions
Analysts have become more pessimistic about Arm Holdings' earnings outlook, with two downward revisions for fiscal 2025 and one for fiscal 2026, while there have been no upward revisions during the same period, signaling potential concern over future performance.
ARM Stock Remains Expensive
Despite the significant decline in the three months, ARM stock is still relatively expensive. It is currently priced at around 78.5 times forward 12-month earnings per share, which is significantly higher than the industry’s average of 35.2 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 162.8 times, far exceeding the industry’s average of 52.9 times.
Wait for A Better Price
Despite recent volatility, Arm Holdings remains a strong player in the semiconductor industry, driven by its dominant architecture and exposure to AI and IoT markets. The company's robust licensing model and strong financials post-IPO provide a solid foundation for future growth.
However, timing the entry is crucial for maximizing returns. Given ARM's current valuation, there may still be room for the stock to fall further, even after its recent decline. For investors, it could be wise to wait for a more attractive entry point before buying.
ARM currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.