Arm Holdings: Undervalued Stock Poised for Upside Growth

Arm Holdings stock has underperformed the tech sector, trading down 16% from its all-time high. However, the stock has jumped 56% in the past three months and could see a boost from its fiscal 2026 first-quarter results on July 30. Arm's earnings have grown at an impressive pace, making the stock relatively cheaper. It's trading at 193 times earnings, nearly a third of its price-to-earnings ratio at the end of June 2024, and analysts expect a jump in earnings going forward.

Arm Holdings plc (NASDAQ: ARM) has been a focal point in the semiconductor sector, with its stock performance closely mirroring industry ETFs such as the iShares Semiconductor ETF. Over the past year, Arm Holdings has seen its stock influenced by broader market narratives, leading to significant price movements. Despite recent volatility, analysts remain optimistic about the company's long-term prospects.

The stock has underperformed the tech sector, trading down 16% from its all-time high. However, it has rebounded sharply in the past three months, jumping 56%. This rebound is attributed to a broader recovery in the semiconductor sector and the wider stock market. Analysts at Mizuho believe the company is well-positioned to benefit from several sector-specific growth catalysts in the near term [1]. Mizuho reiterated its "Outperform" rating on ARM stock and raised its price target to $180 from $160, implying about 16% upside from current levels.

Guggenheim has also boosted its price target by 27% to $187 per share, citing growing optimism and heightened expectations for the company [1]. Mizuho highlighted multiple drivers for Arm’s growth, including revenue from Cobalt, its collaboration with OpenAI on Project Stargate, a potential CPU partnership with Meta Platforms, and SoftBank’s acquisitions of AI chip companies Ampere and Graphcore, which could add around 1,500 engineers to Arm’s CPU development efforts.

However, Arm Holdings trades at about 208 times current earnings and 86 times forward earnings, indicating a high valuation [1]. Its valuation also appears stretched when looking at its price-to-sales ratio. Despite these challenges, Mizuho’s sentiment remains "strongly positive," calling Arm a "key AI enabler," underpinned by growing cloud market share, strategic partnerships, and long-term innovation in chip design [1].

Investors should closely monitor the company's financial performance and the broader semiconductor sector trends to make informed investment decisions. The recent market movements have dragged ARM stock to unsustainable levels, but the company's long-term prospects remain promising.

References:
[1] https://investorsobserver.com/news/stock-update/arm-stocks-price-tag-looks-steep-but-mizuho-says-the-ai-story-isnt-fully-priced-in/
[2] https://ca.investing.com/news/analyst-ratings/bnp-paribas-exane-upgrades-arm-holdings-stock-on-asic-potential-93CH-4104391
[3] https://www.investors.com/stock-lists/ipo-analysis/arm-stock-nvidia-partner-buy-point/
[4] https://www.nasdaq.com/articles/microvast-vs-arm-holdings-which-tech-growth-stock-better-bet