Is Arm Stock a Buy on the Dip as Agentic AI Opportunity Emerges?

Arm Holdings (NASDAQ: ARM) shares continued their rollercoaster ride this year, sinking after its Q3 earnings report came out on Nov. 4. The semiconductor stock still trades up more than 50% on the year, although it's down more than 60% from its 52-week high.

The latest dip came despite management saying it is now more confident it can secure enough supply to hit $2 billion in central processing unit (CPU) revenue across fiscal 2027 and 2028. With shipments set to begin later this calendar year, that is essentially five and a half fiscal quarters.

Arm has long used a licensing and subscription model, where it provides its IP (intellectual property) for customers to design their own chips. However, it surprised investors this year when it revealed that it would begin making its own chips for the first time, given the booming market in data center CPUs. At the time of the announcement, Arm projected that it would be able to take a 15% market share in what it saw becoming a $100 billion market by 2031. Since then, Nvidia and Advanced Micro Devices have projected that the market will reach $220 billion by 2030, given the surge in agentic AI.

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Arm claims that its Artificial General Intelligence (AGI) CPUs provide twice the per-rack performance of AMD's EPYC 9755 CPU. Notably, though, this is a chip introduced in late 2024, not one of its newer chips based on AMD's new Venice architecture, which is designed specifically for agentic AI. Arm has orders for its AGI CPUs from multiple customers through calendar 2027, with shipments expected to begin in Q4 2026.

However, demand for its AGI CPUs isn't the big concern with investors; it's whether the company can produce its chips in a tight market for components and fab capacity. As such, the company's comments that it was becoming more comfortable reaching its loftier $2 billion CPU goal should be viewed as a positive.

Meanwhile, ARM said that its data center royalty revenue doubled in the quarter. It believes this revenue will continue to grow in the triple digits over the next few years as data centers transition from x86 architecture, used by AMD and Intel CPUs, to ARM-based solutions. It said it has a 50% server market share among large hyperscalers at the end of 2025, rising to 60% by the end of 2026.

Arm's core business, meanwhile, remained solid in fiscal Q2. Overall revenue climbed 27% to $1.44 billion, while annualized contract value (ACV), which smooths out license revenue, rose 12%. License revenue surged by 50% year over year to $773 million. The company said this was $100 million more than expected due to customers signing long-term deals to access its technology. It signed three new Arm Total Access agreements in the quarter, bringing the total to 60, and four compute subsystem licenses. Large shareholder and partner SoftBank contributed $209 million in revenue in the quarter.

Royalty revenue, meanwhile, rose by 8% year over year to $670 million. The growth was driven by continued adoption of its higher-cost Armv9 architecture and Arm CSS platform and growing data center business. This helped offset weakness in the smartphone market.

Looking ahead, Arm forecasts fiscal Q3 revenue to come in around $1.54 billion, representing year-over-year growth of 24%. License revenue is projected to surge roughly 50%, while royalty revenue is expected to rise in the low single digits given the pressures in the smartphone and PC markets due to high memory prices. It guided for adjusted earnings per share to be between $0.52 and $0.60.

Is Arm stock a buy?

Arm is well positioned to be one of the biggest beneficiaries of agentic AI through a combination of its booming custom CPU business and starting to sell its own server CPUs. The company projects it can generate around $2 billion in incremental revenue from its new AGI CPU business over the next five quarters starting in its fiscal Q4. Meanwhile, if it can achieve a 15% market share, that would grow to more than $30 billion in revenue for a market projected to hit $220 billion in a few years. This should more than overcome any weaknesses in current smartphones and PCs.

The question really comes down to valuation and growth. Arm has always commanded a huge multiple given its IP royalty and subscription business model, but now that it's designing its own chips, its multiple should shrink. Currently, the stock has a forward price-to-earnings (P/E) ratio of over 55 based on the fiscal 2028 (ending March 2028) consensus estimates. However, the longer-term consensus does not fully reflect the company's AGI CPU opportunity, with the fiscal 2031 analyst revenue estimate at just under $26 billion, though it could come in closer to $40 billion if things play out in its favor.

As such, I'd be a buyer of this AI stock on this recent dip, as it will likely look cheap in a few years if the AI build-out continues.

Geoffrey Seiler has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices, Arm Holdings, and Nvidia. The Motley Fool has a disclosure policy.