Arm Holdings plc ARM stock has declined significantly over the past three months. Shares have declined 30% compared to the industry’s 18% fall.

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Considering the current weakness of ARM shares, investors may wonder if now is the right time to invest in the stock. Let’s delve deeper.

ARM's Stronghold in Mobile and AI

Arm Holdings maintains a dominant foothold in the semiconductor industry, especially in mobile device technology. Its low-power chip architecture has long been a critical component in smartphones and tablets. Major tech giants like Apple AAPL, Qualcomm QCOM, and Samsung have consistently relied on ARM’s designs, making the company a backbone of mobile computing. As Apple, Samsung, and Qualcomm expand their product ecosystems, Arm’s technologies continue to see stable, long-term demand.

Looking ahead, the company is well-positioned to benefit from rapid advancements in artificial intelligence and the Internet of Things. Its energy-efficient chips are increasingly embedded in smart devices, autonomous technologies, and cloud infrastructure. With AI workloads and IoT deployments accelerating, the need for scalable, power-efficient solutions has never been greater. Arm Holdings’ ongoing efforts to tailor its architecture for AI applications further enhance its growth prospects. As Apple, Qualcomm, and Samsung push forward in these spaces, ARM is poised to grow alongside them.

ARM's Licensing Model and Financial Strength

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 revenues without significant capital expenditure. Furthermore, partnerships with key industry players allow the company to maintain relevance, ensuring it remains a preferred choice in sectors like automotive, data centers, and smart devices.

Arm Holdings’ IPO brought in a significant influx of capital, strengthening its balance sheet. As of Dec. 31, the company held $2.7 billion in cash and had no debt. With a healthy cash reserve, it is better positioned to fund its research and development initiatives, pursue strategic acquisitions, and expand its market presence. This financial flexibility also places the company in a stronger competitive position, enabling it to weather market fluctuations and invest in future growth opportunities.

ARM’s Strong Guidance

Arm Holdings provided guidance for the fourth quarter of fiscal 2025, anticipating revenues between $1.175 billion and $1.275 billion, with the midpoint indicating a 32% year-over-year increase. The company expects adjusted EPS to range from 48 cents to 56 cents, implying 44% growth at the midpoint compared to the prior year’s 36 cents. While the third-quarter fiscal 2025 results were solid, we believe the strong fourth-quarter guidance should reassure investors that AI-driven growth is progressively materializing in the financials.

The Zacks Consensus Estimate for ARM’s fiscal 2025 earnings is pegged at $1.62, indicating 27.6% growth from the year-ago level. Earnings for fiscal 2026 are expected to increase 23.8% from the prior-year actuals.

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The company’s sales are expected to rise 23.8% and 22.5% year over year, respectively, in fiscal 2025 and 2026.

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ARM's Valuation Remains Significantly Elevated

ARM stock is currently expensive. It is priced at around 54.19 times forward 12-month earnings per share, significantly higher than the industry’s average of 23.83 times. When looking at the trailing 12-month EV-to-EBITDA ratio, ARM is trading at around 225.49 times, far exceeding the industry’s average of 16.79 times.

Wait for a Better Price

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 be room for the stock to fall. Investors should wait for a more attractive 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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