Arm Holdings plc ARM stock has lost significantly over the past three months. Shares have plunged 21.8% compared with the industry’s and the Zacks S&P 500 Composite’s declines of 14.4% and 7.8%, respectively.

Three-Month Price PerformanceZacks Investment Research

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Investors may wonder whether now is the right time to make a move on ARM stock, given its weakness over the past three months. Let’s analyze to conclude.

Strategic Expansion in Server Market Aids Arm Holdings

ARM’s tendency to expand its presence in the server market is gaining significant traction, with industry giants like NVIDIA NVDA and Microsoft MSFT, adopting Arm-based architectures swiftly. NVIDIA is currently using Arm9 for its Grace Blackwell super chip, and Microsoft has announced that it will be expanding its Arm-based data center chips. Per management, nearly 50% of the new server chips shipped to key hyperscalers in 2025 will be Arm-based. This represents a 15% growth from 2024, highlighting the rapid adoption of ARM’s technology in this sector. Substantial growth in server chip market share, backed by major players including NVIDIA and Microsoft, solidifies Arm Holdings’ position as a force to be reckoned with in the high-performance computing field.

ARM’s Business Model: Blueprint for Growth

Arm Holdings’ business model is centered around licensing its chip designs and collecting royalties. This model enables the company to generate a consistent stream of revenues while minimizing capital expenditure. This productive business structure, coupled with strategic partnerships, ensures ARM’s relevance and preference in vital growth areas, including automotive, data centers, and smart devices. Moreover, the company’s robust financial position is underlined by an influx of capital from its initial public offering and a strong cash reserve of $2.7 billion with no debt. This enhances Arm Holdings’ ability to fund R&D, pursue buyouts, and conduct market expansion, providing a significant competitive edge within its industry peers.

Arm Holdings’ Strong Liquidity Position

ARM maintains an impressive liquidity position, facilitated by its consistent cash growth and low short-term debt levels. In the fourth quarter of fiscal 2025, the company’s current ratio (a measure of liquidity) was 5.2, increasing 4.8% from the preceding quarter and growing nearly twice that of the year-ago quarter’s figure. Additionally, the metric surpasses the industry average of 1.38, further strengthening its liquidity position.Zacks Investment Research

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Story Continues

ARM’s Top-Line Prospect Strong, Bottom-Line Weak

The Zacks Consensus Estimate for ARM’s first-quarter fiscal 2026 revenues is pegged at $1.1 billion, suggesting 11.8% growth from the year-ago level.Zacks Investment Research

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The consensus mark for earnings is pinned at 39 cents per share, down 2.5% from the year-ago quarter.Zacks Investment Research

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Tariff Uncertainties Might Affect ARM’s U.S. Demand

Arm Holdings disclosed that nearly 10-20% of its royalty revenues come from shipments into the U.S. market. The current tariff turbulence could increase the cost of imported chips, potentially harming end-market demand within the United States. Furthermore, this economic uncertainty could make imported devices pricier than domestically produced alternatives, affecting ARM’s competitive position within the market. ARM’s royalty payments could be hurt due to the reduction in sales of Arm-based products. We also anticipate that this hiccup could be detrimental to Arm Holdings’ licensing business, potentially delaying new product development and harming demand for ARM’s technology licenses.

Arm Holdings Look Pricey

ARM stock is currently expensive. It is priced at around 61.13 times forward 12-month earnings per share, significantly higher than the industry’s average of 26.62 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 95.34 times, far exceeding the industry’s average of 16.4 times.

Refrain From Buying ARM Now

ARM’s expansion within the server market, backed by industry giants such as NVDA and MSFT, sets an optimistic tone for investors. A diversified business model, combined with a strong financial position, provides a solid foundation for future growth. Furthermore, a strong liquidity position captures significant investor attention.

However, Arm Holdings’ current valuation is a red flag. A premium valuation, as such, suggests room for the stock to decline significantly. Hence, we recommend that investors be cautious and refrain from buying the stock at this time. Rather, they should wait for a suitable entry point before buying the stock.

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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This article originally published on Zacks Investment Research (zacks.com).

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