ARM Stock: Is It Still a Buy in 2026 Amid Record Earnings and Market Cautiousness?

The question of whether ARM Holdings (ARM) remains a compelling investment in 2026 hinges on a delicate balance: the company's record-breaking earnings and strategic momentum in AI-driven computing must be weighed against its sky-high valuation multiples and rising R&D costs. With revenue growth accelerating and royalty streams expanding, ARM appears to be capitalizing on the global shift toward energy-efficient, AI-optimized architectures. Yet, as the semiconductor industry braces for a potential slowdown in demand, investors must ask whether the stock's premium valuation is justified-or if it leaves little room for error.

Record Earnings and Strategic Momentum

ARM's financial performance in 2025 and early 2026 has been nothing short of stellar. For Q3 2025, the company reported revenue of $983 million, a 19% year-on-year increase, driven by a 23% surge in royalty revenue to $580 million and a 14% rise in licensing revenue to $403 million. By Q2 2026, revenue had further accelerated to $1.14 billion, a 34% year-on-year jump, with non-GAAP operating income reaching $467 million and a margin of 41.1% according to Q2 2026 earnings. This growth is underpinned by ARM's dominance in AI and data center markets, where its Neoverse CPUs have been deployed in over one billion units, and its Compute Subsystems (CSS) are now active in 19 licenses across 11 companies according to Futurum Group.

Strategic partnerships, such as the collaboration with Meta to enhance AI efficiency and the acquisition of DreamBig Semiconductor to bolster networking capabilities, further solidify ARM's position as a key player in the AI infrastructure race. These moves align with the company's long-term vision to leverage energy-efficient compute solutions in power-constrained environments like data centers and edge computing.

Valuation Concerns: High Multiples and Rising R&D Costs

Despite ARM's impressive earnings, its valuation remains a point of contention. As of November 2025, the stock traded at a price-to-sales (P/S) ratio of 31.6x, significantly higher than the semiconductor industry average of 4.5x and the peer group average of 6.9x according to Simply Wall St. By Q2 2026, the P/S ratio had edged closer to 38.4x in some reports, reflecting a valuation premium that far outpaces fundamentals according to Yahoo Finance. Meanwhile, the price-to-earnings (P/E) ratio stood at 141x, a level that raises eyebrows even for a company with ARM's growth trajectory according to Yahoo Finance.

The disconnect between ARM's valuation and its financials is partly attributable to its aggressive R&D spending. In Q3 2025, R&D expenses reached $533 million, a 23% year-on-year increase according to Yahoo Finance, and by Q2 2026, these costs had surged to $648 million, up 31% YoY according to Q2 earnings. While such investments are critical for maintaining leadership in next-generation architectures like chiplets and SoCs, they also pose a risk. If demand for ARM's IP slows or if competitors like Intel or AMD gain traction in AI-specific markets, the company's margins could come under pressure.

Long-Term Potential: Justifying the Premium?

ARM's ability to sustain its valuation hinges on two factors: the scalability of its royalty model and the execution of its AI-driven roadmap. The company's royalty rates now exceed 10% of average selling prices for some platforms, a significant improvement from previous years, and its CSS technology is reducing development cycles while increasing value capture per device according to Futurum Group. These trends suggest that ARM's revenue model is evolving from a pure licensing play to a more sustainable, high-margin royalty engine.

However, the semiconductor industry's cyclical nature introduces uncertainty. While ARM's 2026 guidance projects $1.225 billion in Q3 revenue and a 28.96% annual earnings growth rate according to Q2 earnings, analysts caution that the current valuation leaves little margin for error. A slowdown in AI adoption, regulatory headwinds, or a misstep in R&D could trigger a sharp re-rating.

Conclusion: A Buy, But With Caution

ARM's record earnings and strategic positioning in AI make it a compelling long-term investment for those who believe in the secular shift toward energy-efficient computing. The company's royalty-driven model, combined with its expanding ecosystem of partners and innovations in CSS and chiplets, provides a strong foundation for growth. However, the stock's elevated multiples-30-40x sales in a sector averaging 5x-demand a high degree of confidence in ARM's ability to execute.

For risk-averse investors, the current valuation may appear precarious. For those with a longer time horizon and a tolerance for volatility, ARM's momentum in AI and data centers could justify the premium. The key will be monitoring R&D efficiency, royalty adoption rates, and the broader semiconductor cycle. If ARM can maintain its innovation edge while managing costs, the stock may yet prove its worth.