After a spectacular rally in early 2024, shares of Arm Holdings (ARM) have taken a sharp downturn, falling 40% from their 52-week high and posting negative year-to-date returns. While valuation concerns were already weighing on the stock, a new challenge has emerged.
Qualcomm’s Antitrust Complaint Adds Pressure
Arm’s stock tumbled more than 7.5% on March 26 after a Bloomberg report revealed that Qualcomm (QCOM) had filed a global antitrust complaint against the company. Qualcomm has taken its concerns to regulators in the U.S., Europe, and Korea, alleging that Arm’s business practices stifle competition. The chipmaker argues that Arm, once known for its open licensing model, is now restricting access to its technology to bolster its own chipmaking business.
According to the report, Arm has resisted these claims. The company emphasized its commitment to innovation, competition, and contractual obligations, dismissing Qualcomm’s complaint as an attempt to gain leverage in an ongoing commercial dispute. Regardless of the outcome, the regulatory battle adds uncertainty to Arm’s future growth.
Financial Strength and Growth Prospects
Arm’s recent financial performance has been impressive. The company reported third-quarter revenue of $983 million, driven by a 23% year-over-year increase in royalty revenue, which reached $580 million. This growth reflects the growing adoption of Arm’s advanced Armv9 architecture and strong demand for its Compute Subsystems (CSS) and custom silicon solutions in data centers.
Looking ahead, Arm is poised to benefit significantly as artificial intelligence (AI) hardware evolves. The need for more on-device processing will drive demand as its technology enables faster on-device processing and reduces reliance on energy-intensive cloud interactions. Further, the company is witnessing an increase in AI-led cloud demand, driven by large-scale AI training and inference. Arm will also benefit from increasing chip complexity and demand for custom silicon, which will support its royalty revenue.
Arm’s strategic partnerships will also play a key role in its growth. Amazon’s (AMZN) AWS, for instance, revealed that over half of its newly deployed CPU capacity in the past two years has been based on Arm’s Graviton processors, reflecting the increasing adoption of Arm’s technology in cloud computing.
Arm’s CSS platform, now shipping at scale, will drive royalty revenue growth. With its ability to reduce development costs and speed up production, CSS is poised to witness higher demand, driving the company’s financials.
Challenges and Risks
Despite its growth potential, Arm faces significant risks. The legal dispute with Qualcomm introduces regulatory uncertainty that could impact its business. If competition authorities rule against Arm, it may affect its revenue streams and profitability. Given the complexity of antitrust investigations, this issue could take years to resolve, creating a lingering overhang on the stock.
Broader macroeconomic conditions also pose a challenge. A slowdown in global tech spending and reduced demand for consumer electronics could weigh on Arm’s revenue growth.
Is ARM Stock Overvalued?
While Arm stock has pulled back, it still looks overvalued. ARM trades at a forward price-earnings (P/E) multiple of 137.8x and its price-sales (P/S) multiple of 40.28x. These elevated valuation metrics indicate that the market has already priced in significant future growth, leaving little room for error.
While Arm’s long-term growth potential remains strong, such high valuations make the stock particularly sensitive to any signs of slowing momentum. The recent development and potential regulatory scrutiny raise the possibility of unforeseen disruptions, which could trigger further downside pressure if growth expectations fall short.
The Bottom Line
Arm Holdings’ long-term prospects appear promising due to its dominant position in the semiconductor architecture market and its strong growth potential in the AI and Internet of Things (IoT) industries. However, several factors warrant a cautious approach. The legal challenges add uncertainty and could negatively impact ARM’s future growth and profitability. Furthermore, ARM’s current valuation is notably high, suggesting that a significant portion of its future growth is already priced into the stock.
Wall Street analysts have a “Moderate Buy” consensus rating on the stock.
