Is Arm Holdings Stock a Buy After Shares Dip Following a Huge Run?

Despite a pullback following its fiscal Q4 earnings report (after the bell on May 6), Arm Holdings (NASDAQ: ARM) shares have been on fire since early March, as investors are super excited about the company's push into data center central processing units (CPUs). With the stock having nearly doubled this year, the question is whether it is still a buy after this post-earnings dip.

Let's dip into the U.K.-based company's recent results and prospects to get a better answer.

Image source: The Motley Fool.

A huge opportunity ahead with some potential risks

Arm made its mark as a leading provider of intellectual property (IP) in the semiconductor industry. Its architecture is one of the foundations for how central processing units (CPUs) work, and is an alternative to the x86 standard used by Intel and Advanced Micro Devices. While its technology is found in various devices, its biggest market has long been smartphones, where it says its technology is in about 99% of high-end models.

Instead of designing physical chips, Arm has historically opted to provide its IP to customers through either a royalty or, more recently, a subscription model, so they could create their own chips. However, the company shocked investors earlier this year when it said it would develop its own data center CPUs, given the huge growth it sees in the market over the next several years. It sees the market climbing to $100 billion in the next few years, and believes it could take a 15% market share.

Meanwhile, Arm's core business continued to hum along in its fiscal Q4 results. Revenue climbed 20% to $1.49 billion, while annualized contract value (ACV), which smooths out license revenue, jumped 22%.

License revenue jumped by 25% year over year to $819 million, driven by demand for its next-generation architecture. Its agreement with Softbank contributed $200 million in revenue. It signed two Arm Compute Subsystems licenses in the quarter, one for smartphone chips and another for data center networking chips.

Royalty revenue, meanwhile, increased by 11% year over year to $819 million. The company said data center royalty revenue doubled and that it sees no let-up in sight. It noted particular strength in data processing units (DPUs) and SmartNICs, where it says it holds nearly 100% market share. Meanwhile, it continues to see smartphone revenue growth despite overall market weakness, helped by higher royalty rates of its newer Armv9 architecture

Looking ahead, Arm guided for fiscal Q1 revenue to come in around $1.26 billion, representing year-over-year growth of 20%. Both royalty and licensing growth are projected to grow at a similar 20% pace. It forecasted that adjusted earnings per share will be between $0.36 and $0.44.

Management reiterated its expectation to generate $15 billion in CPU revenue and $10 billion in IP revenue in 2031. That would equal around $9 in EPS. It noted that it has a line of sight into more than $2 billion in demand for CPUs across its fiscal years 2027 and 2028. However, it said it was maintaining its $1 billion in CPU revenue forecast due to supply constraints, with revenue beginning in Q4 of fiscal 2027.

Is Arm Holdings a buy?

The data center CPU market looks poised to explode with the rise of agentic AI, and Arm is well-positioned to be one of the big beneficiaries. Not only is the company set to start generating revenue from its own CPUs, but it also benefits from increasing demand for Arm-based data center chips like Amazon's Graviton and Alphabet's Axion chip. In addition, the company is seeing strong growth from other AI chips like DPUs and SmartNICs.

The biggest issue for Arm in this area going forward is supplying components and getting foundry capacity, something it has not had to deal with in the past with its IP model. Meanwhile, with memory costs soaring, there could be more pressure on smartphone sales, which could temper its royalty revenue.

With the stock trading at a forward price-to-earnings (P/E) ratio of around 73 based on analysts' fiscal 2027 consensus, I wouldn't chase it at these levels given supply chain and smartphone volume risks.

Geoffrey Seiler has positions in Advanced Micro Devices, Alphabet, and Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, and Intel. The Motley Fool has a disclosure policy.