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UK-based chip designer Arm Holdings plc (ARM) has been riding the artificial intelligence (AI) boom to impressive heights, with its shares surging 25% on its first trading day alone. The company's innovative chip designs have quickly become essential for tech giants like Advanced Micro Devices (AMD), Apple (AAPL), Nvidia (NVDA), and Qualcomm (QCOM).
Arm’s ambitious projections of reaching 100 billion AI-ready devices by next year and its swift inclusion in the Nasdaq-100 Index ($IUXX) underscore both its huge impact on and expanding reach within the tech industry.
However, ARM stock has pulled back 40% from its July peak of $188.75 amid heavy selling pressure following its Q1 earnings announcement - and today’s widespread global stock slump isn’t helping matters, either. But is this steep drop a rare buying opportunity for investors to scoop up the premium-priced shares of ARM? Let’s take a closer look to find out.
About Arm Holdings Stock
Founded in 1990, Arm Holdings plc (ARM) is at the forefront of computing innovation. Commanding a market cap of around $118.9 billion, the company’s energy-efficient processors and software platforms power over 290 billion chips globally. From sensors to supercomputers, Arm’s technology drives advanced computing across a vast ecosystem of devices.
Shares of this chipmaker have rallied almost 48% in 2024, significantly outperforming the broader S&P 500 Index’s ($SPX) return of just 8.6% on a YTD basis.
Even after the stock’s recent pullback from its highs, ARM isn’t exactly cheap from a valuation perspective - a frequent criticism of the stock among its critics. Priced at a lofty 147.73 times forward earnings, or roughly 73x forward adjusted earnings, the stock is trading at a much richer premium than its industry peers.
Arm Slides After Q1 Earnings
Following the company’s fiscal 2025 Q1 earnings results on July 31, ARM stock took a nosedive, crashing 15.7% in the subsequent trading session. The company’s revenue skyrocketed 39% year over year to $939 million, topping estimates by a 3.5% margin, fueled by booming AI demand and the growing adoption of its compute subsystems across key markets.
Royalty revenue hit $467 million, marking a 17% increase from the prior-year quarter, thanks to increasing penetration of Armv9-based chips, which typically command a higher royalty rate and strong growth in premium smartphones.
License and other revenue surged by an impressive 72% annually to $472 million. On an adjusted basis, the chipmaker earned $0.40 per share, which blew past estimates by a solid 15.5% margin and reflected a remarkable 67% year-over-year growth.
Despite reporting better-than-expected top and bottom-line figures, the chipmaker's underwhelming full-year forecast stole the spotlight. Plus, the company’s decision to halt the disclosure of Arm-based chip shipments starting this quarter only fueled further market negativity around the stock.
For fiscal 2025, management projects total revenue to range between $3.80 billion and $4.10 billion, while adjusted EPS is anticipated to land between $1.45 and $1.65. Analysts had higher hopes, with forecasts calling for $1.58 in adjusted earnings per share and $4.02 billion in total revenue.
What Do Analysts Expect For Arm Holdings Stock?
Despite Arm’s disappointing full-year guidance, Wall Street analysts stepped up to defend the British chipmaker post-Q1 earnings release. Bank of America’s (BAC) Vivek Arya said in a post-report note that while the company exceeded expectations with strong licensing performance in Q1, cyclical headwinds in IoT, networking, and industrial sectors weighed on the full-year and Q2 projections.
Arya acknowledged that the stock's premium valuation might face near-term pressure due to a lack of immediate growth catalysts, but maintained a “Buy” rating with a $180 price target. The analyst highlighted Arm's strategic advantages, including its role in crucial semiconductor trends such as rising computing and networking complexity, increased demand for custom chips from leading cloud providers, and the expanding influence of AI.
Furthermore, Citi (C) analyst Andrew Gardiner also expressed confidence in Arm after its Q1 results, raising his price target to $170 from $140. Gardiner noted that while near-term royalty weakness is a challenge, the company's long-term licensing strength is expected to more than compensate for any short-term setbacks, reinforcing a positive outlook for Arm's future.
Overall, ARM stock has a consensus “Moderate Buy” rating. Out of the 24 analysts covering the stock, 15 suggest a “Strong Buy,” eight recommend a “Hold,” and the one has a “Strong Sell” rating.
The average analyst price target of $132.09 indicates a potential upside of nearly 20% from the current price levels - an interesting development amid the recent ARM pullback, given that the stock has more frequently traded at a premium to its average price target from Wall Street.
The Street-high target of $190, newly raised by Morgan Stanley (MS) last month, suggests that ARM stock could rally as much as 72.5% from here.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
