Chip design and semiconductor technology company Arm Holdings (NASDAQ:ARM) tipped nearly $180 per share in mid-June. That’s more than three times its IPO price of $51, and the stock is currently trading at 103x non-GAAP forward earnings. Personally, I can’t get behind Arm for this valuation, despite its impressive growth trajectory and ambitions to be a linchpin of the future of artificial intelligence (AI). It may be too late to buy the stock at current levels.
Arm Holdings defies logic
Arm Holdings clearly wasn’t cheap when it went public in September. After all, the stock was trading quite flat until February. However, there have been several positive catalysts since then. One by one, they seem to have raised Arm’s rating beyond what would be considered logical or justified on the face of it.
For context, Arm Holdings stock currently trades at 554x GAAP TTM earnings, 185x GAAP forward earnings, and 103x non-GAAP forward earnings. This makes it stratospherically expensive compared to the broader sector. The non-GAAP forward earnings ratio represents a 343% premium compared to the information technology sector as a whole. Furthermore, the PEG ratio currently stands at 3.25x (1.0x or less is generally considered undervalued), which suggests the stock is either overvalued or its intrinsic value is medium-term.
Naturally, many analysts are still bullish on Arm holdings. This is due to strong long-term growth prospects in data centers, PCs, IoT and automotive. The company’s dominance in the mobile and IoT markets, expanding market share in new segments and exciting AI-driven opportunities position it as a potential global computing platform leader with significant future revenue growth. The company also has exceptional margins (gross profit margin of 95.2%).
Arm Holdings’ Earnings Catalysts
What’s Driving Arm Holdings Stock Forward? In February, Arm Holdings saw its shares rise more than 40%, driven by optimism around AI. This rally followed quarterly guidance that exceeded Wall Street expectations, pushing the company’s market value to a record $141 billion.
The company’s upside earnings surprises have been quite large this calendar year. In the third fiscal year, the company posted normalized earnings per share (EPS) of $0.29, exceeding expectations by $0.04, and in the fourth quarter, Arm achieved earnings per share of $0.36, exceeding expectations exceeded by $0.05.
Arm holdings and everything related to AI
The share price has also been affected by reports that the company – which designs chips for a range of applications including AI – was eyeing the development of its own AI chip. This AI chip division would like to develop its first prototype in 2025. The reports do not indicate whether Arm and its parent company, SoftBank (OTC: SFTBY), would essentially form a new company or that the new entity would fall within Arm.
Arm could potentially be SoftBank’s most important asset as it reportedly plans to start building data centers in 2026, with a focus on renewables and using its own chips. ARM shares rose more than 6% after the report came out.
This report has been supplemented by additional AI-focused announcements and continued enthusiasm for the sector. In May, Arm unveiled its latest computing solution for AI smartphones and PCs, called Arm Compute Subsystems (CSS) for Client, featuring Armv9.2 CPUs and Immortalis GPUs with 3nm implementations. CSS improves computer and graphics performance by more than 30% and AI inference by 59%. Arm also introduced Kleidi software for AI and computer vision applications, which integrates with major AI frameworks.
Furthermore, CEO Rene Haas added more fuel to the fire in June when he reportedly said that 100 billion of Arm’s devices will be AI-ready by the end of 2025. There has also been a small boost from the successful listing of the Arm-backed Raspberry Pi (LSE:RPI). Recent analyst upgrades have also helped.
Is Arm Holdings a Buy According to Analysts?
On TipRanks, Arm Holdings comes in as a Moderate Buy based on 13 Buys, four Holds, and one Sell rating assigned by analysts over the past three months. The average Arm Holding price target is $130.76, which implies a downside potential of 20.6%.
There is still more to unpack
While the average price target may indicate a 20.6% downside, it’s worth noting that analysts can occasionally struggle to keep up with fast-moving stocks like Arm. This is especially true when there are so many positive catalysts, and we are, to some extent, in uncharted territory with AI.
In this case, it’s worth noting that the last four analysts covering the stock have set higher price targets than the average price target. Guggenheim raised its price target to $169, Mizuho Securities issued a price target of $160, Rosenblatt Securities put Arm at $180, and Bank of America (NYSE:BAC) raised his price target from $150 to $180.
The average price target of the four most recent forecasts – all issued in the last two weeks – is $172.25. This would represent an upside potential of 4.6%.
The bottom line in arm holding
Arm Holdings is one of the most exciting and interesting AI stocks out there. Several analysts point to long-term catalysts in AI that will propel the company to new heights, coupled with the company’s truly exceptional margins. But personally, as much as I like the British success story, I’m neutral on the stock. It’s going to take a lot of growth to justify the current price tag.
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