For many investors, the conversation around the semiconductor industry isn’t always the clearest. Some companies are fabricators, others are designers, and then there’s Arm Holdings (NASDAQ:ARM) which is a designer for designers, which puts ARM stock in an interesting position.
That’s because Arm sells the chipset instructions for some of the most sought-after designs for processors that go into devices that need to be energy efficient like cellphones, tablets and laptops. This has resulted in a set of market conditions that have caused ARM stock to soar over the last year.
Until recently, ARM’s main competitor, Intel (NASDAQ:INTC) held a strong position in the processor market thanks to the ubiquity of its x86 chipset design.
This format of processing instructions kept Intel’s chips ahead in processing power despite their power-hungry operation.
Yet, with Intel now struggling to survive its generational struggle for its reputation as its 13th and 14th generations of chips experience catastrophic microcode failures, the door for Arm’s dominance has never been more open.
ARM vs x86
Currently, ARM’s stock is soaring on its design integration into major tech company’s products like Qualcomm (NASDAQ:QCOM) and Apple (NASDAQ:AAPL), who all rely on the company’s power-efficient processors to enable the power of the MacBook and Snapdragon products they sell.
For a long time, Apple in particular relied on Intel’s processors for its computers, but with the introduction of the M1 chip, which runs on ARM architecture, the company has become an independent designer of the chips its computers rely on.
Nowadays, Intel’s lack of innovation for more power-efficient chips has relegated its products to high-powered personal computers rather than phones and laptops, which have become far more consistent revenue drivers than the former.
Moreover, with Microsoft (NASDAQ:MSFT) recently announcing a new line of artificial intelligence laptops running on ARM architecture, Windows OS will receive a long-awaited version that is compatible with the ARM architecture as the software was previously designed around Intel’s x86 exclusively.
The Financial Story
ARM stock price has been on the decline recently despite relatively strong revenue growth in its most recent earnings report.
Part of this can be attributed to the company’s guidance staying the same with the predicted decline in royalty income. Even with the recent decline, the stock is up nearly 56% this year.
For its first fiscal quarter of 2025 which it reported back in June, ARM’s revenue grew 39% year over year to $939 million.
This surpassed its previous revenue guidance of $875 million to $925 million. The company also successfully surpassed forecasted adjusted EPS by 67%.
As a result, the company remains financially healthy and has the necessary momentum to grow into the opportunity currently forming in the semiconductor design market.
Yet, at a price-to-earnings ratio of 272x, the stock is still genuinely expensive. Thus, the question becomes, is ARM stock a buy after its recent dip, or should investors hold off on what could be a potential overvaluation?
To Buy or To Hold ARM Stock?
At its current price of $107, ARM stock might seem cheap compared to its recent all-time high of $188.75, yet the potential for overvaluation is high.
With all of the hype currently surrounding the tech industry and the broader potential for another selloff like the one that occurred this Monday, ARM stock could be risky to buy into right now.
Looking at the stock’s first support level of around $100, the stock could dip further before its next earnings report, meaning it’s currently in a selling phase. Thus, investors may want to wait for the stock to get cheaper and for its P/E ratio to contract a bit before buying in.
Ultimately, ARM likely has a bright future ahead of it, but with the broader market instability and profit-taking behaviors in preparation for more volatility, ARM stock is a hold.
On the date of publication, Viktor Zarev did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.