Arm Holdings Plummets 22% in 3 Months: Buy, Sell or Hold the Stock?

Core Viewpoint - Arm Holdings plc (ARM) has experienced a significant decline in stock price, dropping 21.8% over the past three months, which is worse than the industry's decline of 14.4% and the Zacks S&P 500 Composite's decline of 7.8% [1][4]. Group 1: Market Position and Expansion - ARM is strategically expanding its presence in the server market, with major companies like NVIDIA and Microsoft adopting Arm-based architectures. It is projected that nearly 50% of new server chips shipped to key hyperscalers in 2025 will be Arm-based, representing a 15% growth from 2024 [5]. - The growth in server chip market share, supported by industry giants, solidifies ARM's position in high-performance computing [5]. Group 2: Business Model and Financial Health - ARM's business model focuses on licensing chip designs and collecting royalties, allowing for consistent revenue generation with minimal capital expenditure. This model, along with strategic partnerships, ensures ARM's relevance in growth areas like automotive and data centers [6]. - ARM has a strong financial position, highlighted by a cash reserve of $2.7 billion and no debt, enhancing its ability to fund R&D and market expansion [6]. - The company's liquidity is impressive, with a current ratio of 5.2 in Q4 fiscal 2025, which is significantly higher than the industry average of 1.38 [7]. Group 3: Revenue and Earnings Outlook - The Zacks Consensus Estimate for ARM's first-quarter fiscal 2026 revenues is $1.1 billion, indicating an 11.8% growth from the previous year [9]. - However, the consensus estimate for earnings is 39 cents per share, reflecting a 2.5% decline from the year-ago quarter [10]. Group 4: Market Challenges - ARM faces potential challenges due to tariff uncertainties, with 10-20% of its royalty revenues coming from U.S. shipments. Tariff issues could increase costs and harm demand for Arm-based products in the U.S. market [11]. Group 5: Valuation Concerns - ARM's stock is currently considered expensive, trading at approximately 61.13 times forward 12-month earnings per share, compared to the industry's average of 26.62 times. The trailing 12-month EV-to-EBITDA ratio is around 95.34 times, significantly higher than the industry's average of 16.4 times [13]. - Due to the premium valuation, there is a suggestion for investors to be cautious and refrain from buying ARM stock at this time, waiting for a more suitable entry point [15].