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Valued at a market cap of $167.1 billion, Arm Holdings (ARM) went public in late 2023 and has risen over 150% since its initial public offering. Like Nvidia (NVDA), Arm is at the epicenter of the artificial intelligence (AI) megatrend, which is driving its share price higher. Arm is transforming from a chip design licensing company to a direct producer of AI-focused processors.
The semiconductor giant designs and licenses chips for data centers, among other use cases, aiming to compete with Nvidia and Intel (INTC). Analysts are bullish on Arm’s power-efficient architecture, which is valuable for energy-intensive AI applications. Additionally, the company’s market presence across mobile, Internet of Things (IOT), and automotive verticals positions it well for AI expansion.
Historically, Arm has licensed its technology and designs so that other companies can make their own chips. But now, Arm is planning to launch its own AI chips by 2025, manufactured by partners like Taiwan Semi (TSM), while maintaining its customizable design approach for clients.
According to a CNBC report, Arm has secured Meta Platforms (META) as an early customer, departing from its traditional role as a technology licensor. This move coincides with Meta’s massive $65 billion planned capex in artificial intelligence this year, although Arm’s chip will focus on server processing rather than AI-specific graphics processing.
The news drove Arm’s shares up 6% in a single trading session last week, adding to its 29% gain in 2025.
A Strong Performance in Fiscal Q3 2025
Arm reported strong financial performance in the third quarter of its fiscal 2025, driven by AI-related demand across its ecosystem. Total revenue stood at $983 million in Q3, representing a 19% year-over-year increase, with royalty revenue growing 23% to $580 million. This growth was attributed to the adoption of the latest Armv9 architecture, early Compute Subsystems (CSS) shipments, and increased IoT royalties.
Arm’s strategic position in AI has strengthened through several key initiatives. For instance, it joined the Stargate Project, a major AI infrastructure investment alongside Microsoft (MSFT), Nvidia, Oracle (ORCL), and OpenAI, as these companies plan to spend $500 billion over four years. The company also announced a strategic partnership with OpenAI and SoftBank (SFTBY) called Cristal intelligence, focusing on developing AI agents for complex knowledge work.
In Q3, Arm maintained a healthy gross margin of 97.2% and improved its operating margin to 17.8%. Its adjusted operating income reached $442 million with a 45% margin. ARM ended Q3 with over $2.6 billion in cash and short-term investments. Looking forward, Arm provided optimistic guidance for Q4, projecting revenue between $1.175 billion and $1.275 billion.
Is ARM Stock a Good Buy Right Now?
Arm’s success is mainly due to increasing chip complexity and demand for custom silicon, particularly in AI applications. Major cloud providers like Amazon (AMZN), Google (GOOGL), and Microsoft are optimizing Arm-based chips for their data centers. AWS notably reports that over 90% of its top 1000 EC2 customers use Arm’s Graviton.
Arm’s ecosystem continues to expand, with over 20 million software developers and growing momentum in automotive applications, evidenced by partnerships with major manufacturers, including BMW (BMWKY), Honda (HMC), and Mercedes.
Analysts tracking ARM expect its sales to increase from $4 billion in fiscal 2025 to $4.92 billion. In this period, its adjusted earnings are forecast to expand from $1.61 per share to $2.04 per share, while free cash flow is projected to improve from $444 million to $1.95 billion.
So, ARM stock trades at a lofty multiple, priced at 34x forward sales, 78x forward earnings, and 80x forward FCF. Out of the 28 analysts covering ARM stock, 18 recommend “Strong Buy,” one recommends “Moderate Buy,” eight recommend “Hold,” and one recommends “Strong Sell.” The average target price for ARM stock is $165.25, indicating upside potential of 6% from current levels.
