Should you buy Arm Holdings shares now?

In its short time as a public company, the semiconductor giant Arm Holdings (NASDAQ:ARM) benefited from the stock’s meteoric rise. After debuting last year with an initial public offering (IPO) price of $51 per share, Arm hit a 52-week high of $188.75 in July.

The price has fallen since then, but the stock is still up nearly 100% in 2024. The stock’s performance is understandable as Arm’s business has been in decline, posting record revenue for four straight quarters.

Will the company be able to continue to increase sales? If so, given the elevated share price, does it make sense to invest in the semiconductor chip designer? To get the answer, let’s analyze Arm and determine whether it is a good long-term investment.

Technological advantages of Arm

The foundation of Arm’s success lies in the design of semiconductor chips. The company dominates the mobile device market with over 90% market share thanks to the energy efficiency of its chips.

This is just the beginning. Energy-efficient Arm chips are becoming increasingly popular in more and more devices. This includes the Internet of Things, smart cars and more, which bodes well for the company’s future.

Arm technology is used by the largest technology companies. Hires him Nvidia in its semiconductor products, Amazon Web services (AWS) in cloud computing and Alphabet– Owned Google’s consumer offerings, including the Pixel mobile phone and Nest smart home solutions.

With the advent of energy-intensive artificial intelligence systems, energy-saving Arm chips are in demand here too. Management described the current market situation by stating, “AI’s significant energy needs are driving the growth of the Arm computing platform, which is the most energy-efficient solution available.”

This brings me to a key factor in the company’s future success: its latest Armv9 chip architecture. The company recognized the need for a new chip platform to support AI processing requirements and launched Armv9 back in 2021. The Armv9 architecture allows AI to quickly process the massive amounts of data needed to complete tasks while maintaining energy efficiency.

Adoption of Armv9-based chips is growing, and hence Armv9 accounted for 25% of the company’s $939 million in sales in the fiscal first quarter ended June 30.

Arm’s approach to revenue generation

Arm generates income in two main ways. First, it licenses its semiconductor product designs. The company then collects royalties from those projects, even years after the sale is completed. For example, the company still receives royalties for products developed in the 1990s.

The inherent complexity of Armv9 means it commands higher fees than previous generations of Arm architectures. This allowed the company to increase royalty revenue in the first quarter by 17% compared to the same period last year. Meanwhile, artificial intelligence-driven demand for power-efficient and high-performance chips helped Arm increase sales of licenses and other products by a staggering 72% year over year in the first quarter.

With the advent of the AI ​​era, management expects continued revenue growth. For fiscal 2025, the company expects full-year sales to be between $3.8 billion and $4.1 billion. This is an increase from fiscal 2024 revenue of $3.2 billion.

To buy or not to buy Arm Holdings shares

Arm’s dominance in the mobile phone market, growing adoption of the Armv9 architecture and expected revenue growth in FY 2025 are all factors that make this a worthwhile investment.

The more difficult question is whether now is the time to buy Arm shares. Shares fell on Oct. 23 as the company battled a legal dispute. Could this create a buying opportunity?

Looking at Arm’s price-to-earnings (P/E) ratio, a widely used metric for valuing a stock, can tell you how much investors are willing to pay per dollar of earnings. Comparing it with other semiconductor companies such as Nvidia, BroadcomAnd Advanced microdeviceshelps assess whether Arm shares are overpriced.

YCharts data.

Arm’s P/E ratio is much higher than other companies in the industry, suggesting that its shares are still too expensive. Wall Street analysts have a price target for Arm shares of around $143. With shares closing at $143.75 on October 25, Wall Street appears to agree that the current share price is still too high despite the recent decline.

So while Arm is a company worth considering investing in for the long term, given the elevated share price right now, it’s best to wait for the stock to fall further before making a buying decision.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, chief executive of Alphabet, is a member of The Motley Fool’s board of directors. Robert Izquierdo holds positions at Advanced Micro Devices, Alphabet, Amazon, Arm Holdings and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.