Is Arm Holdings Stock a Buy Now?

It has been just over a year-and-a-half since Arm Holdings (NASDAQ: ARM) made its stock market debut on the Nasdaq exchange in September 2023, and anyone who bought shares of the British technology company during its initial public offering (IPO) is sitting on tremendous gains of 159% as of this writing.

However, Arm stock has witnessed some choppiness on the market of late thanks to the broader sell-off in technology stocks in the wake of the tariff-fueled turmoil. The stock was hammered again earlier this month following the release of its fiscal 2025 fourth-quarter results (for the three months ended March 31) on May 7. Arm stock retreated 6% on the day following its earnings release as its guidance turned out to be below expectations.

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However, the company plays a central role in the global semiconductor industry, an area that's set for solid secular growth in the coming years. This probably explains why investors have started buying Arm stock once again as it is up 13% following its post-earnings drop. Should you join them?

Image source: Getty Images.

Keep this in mind before buying the stock

Arm Holdings is an expensive stock. It is trading at 177 times trailing earnings. The forward earnings multiple of 72 suggests that its bottom line is likely to improve at a terrific pace over the next year, but even that remains on the expensive side. The expensive valuation explains why investors decided to hit the sell button following the company's latest quarterly report.

Though Arm reported healthy year-over-year growth of 34% in its revenue along with a 53% spike in earnings, which was enough to help it beat analysts' expectations, the guidance wasn't solid enough to justify the valuation. The company's revenue guidance for the current quarter points toward a year-over-year increase of just 11%, while earnings are on track to drop by 15%.

Clearly, the guidance doesn't justify the expensive multiples at which Arm stock is currently trading. This poor guidance can be attributed to the potential impact of tariffs on Arm's business. CFO Jason Child pointed out on the recent earnings conference call:

Based on our current visibility, we expect a limited, direct impact on our royalty and licensing revenues. We have less visibility into the indirect impact on end demand. In our royalty business, we estimate that 10% to 20% of our revenues stems from shipments into the US. In licensing, we have found in the past slowdowns such as COVID, that impact is minimal as our customers invest through near-term slowdowns given lengthy chip development timelines.

Arm's conservative guidance stems from the possibility that its royalty business could be impacted if there is a drop in the shipments of chips into the U.S. from the international locations where they are manufactured on account of tariffs. After all, Arm gets a royalty on the sale of each chip that's designed using its intellectual property. A potential rise in the manufacturing costs of chips on account of import duties could have negatively impacted its chip sales and revenue stream.

Given that royalties accounted for 54% of Arm's revenue in the previous fiscal year, it is easy to see why the company adopted a conservative stance. However, semiconductor imports into the U.S. have been exempted from duties, while China has also adopted a similar stance. Even better, the trade war between the U.S. and China is showing signs of cooling down as both economic giants have agreed to substantially roll back reciprocal tariffs while they work on a trade deal.

So, there is a good chance that Arm's numbers for the current quarter could exceed its expectations. Another important thing worth noting is that the company's business is getting a big boost thanks to artificial intelligence (AI), and that could make this stock worth buying from a long-term perspective.

The long-term picture seems bright

While there is no doubt that Arm is trading at an expensive valuation right now, there is a good chance that it may be able to justify its expensive multiple in the long run. That's because the company has been gaining share in the lucrative AI server market. CEO Rene Haas pointed this out on the latest earnings conference call, saying: "Arm is now increasingly the first choice for AI cloud deployments. We expect up to 50% of new server chips at hyperscalers to be Arm based this year."

Haas said that tech giants such as Nvidia, Google, and Microsoft have been designing chips based on the company's AI-focused Armv9 architecture. Investors should note that Armv9 reportedly commands double the royalty as compared to the previous generation architecture. Wall Street analysts are expecting the Armv9 architecture to account for 60% to 70% of Arm's royalty revenue in the future as compared to 25% earlier this year.

This suggests that the company's margin profile could improve in the future following a jump of 3 percentage points in its non-GAAP (adjusted) operating margin in the previous fiscal year. Not surprisingly, analysts are expecting Arm's earnings to grow by 33% in the next fiscal year following a projected jump of 10% in the current one.

However, Arm could end up delivering stronger growth than that thanks to the higher royalty that its AI-centric architecture commands. That's why investors looking for a growth stock can still consider buying Arm as it can sustain its rally by delivering better-than-expected earnings growth.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.