Does Arm’s Growth Justify Its Price After Recent Nasdaq Pullback?

If you have been following the rollercoaster that is Arm Holdings' stock chart, you are definitely not alone. With the price rallying over 8% in the last 90 days, only to give back roughly 14% in the last month, investors are left wondering if it is time to catch the next upward move or play it safe on the sidelines. Just a year out from its public debut, Arm has seen sentiment swing often and sharply, as hopes for AI-fueled growth continue to encounter tough questions about valuation and risk.

What is driving these moves? On one hand, annual revenue has grown by over 18% and net income is up 30%, fueling optimism about Arm’s underlying business. On the other hand, expectations built into the share price appear high, with the latest closing price just over $137 and still about 10% below the average analyst target. The company recently received a value score of only 1 out of 6 on undervaluation checks, suggesting most standard measures see it as expensive right now.

The combination of strong growth and a cautious outlook is making Arm’s valuation a hot topic for investors. Next, we will break down how different valuation methods compare to Arm’s fundamentals. We will also explore a more nuanced way to consider what this stock might truly be worth.

Arm Holdings delivered 1.7% returns over the last year. See how this stacks up to the rest of the Semiconductor industry.

Approach 1: Arm Holdings Cash Flows

A Discounted Cash Flow (DCF) model forecasts a company’s future free cash flows and then discounts them back to the present. The goal is to estimate what the business is truly worth today. This approach seeks to capture the underlying value based on Arm Holdings’ ability to generate cash over time, instead of relying solely on the current market sentiment.

Currently, Arm’s last twelve months’ free cash flow stands at $774 million. Projections indicate significant growth ahead, with annual free cash flow expected to rise sharply and reach $4.97 billion by fiscal year 2030. Analysts and trend estimates suggest that cash flow could more than sextuple over a decade, reflecting optimistic expectations for Arm’s market potential.

Using the two-stage Free Cash Flow to Equity model, the intrinsic fair value for Arm is estimated at $64.27 per share. With the stock recently closing just above $137, this suggests Arm Holdings is trading at about 114.6% above its calculated fair value, indicating it is currently 114.6% overvalued by this measure.

Result: OVERVALUED

Our DCF analysis suggests Arm Holdings may be overvalued by 114.6%. Find undervalued stocks based on DCF analysis or create your own screener to find better value opportunities.

Approach 2: Arm Holdings Price vs Sales

The Price-to-Sales (PS) ratio is often used for valuing fast-growing companies where earnings may still be catching up with rapid revenue expansion. For profitable businesses such as Arm Holdings, the PS ratio offers investors a quick way to compare how much they are paying for every dollar of sales. This helps set market expectations for future growth and profitability.

Strong growth prospects or lower risk can justify a higher PS ratio. In contrast, more moderate outlooks or higher risks might suggest a lower, more typical level. Comparing to benchmarks is useful here. Arm trades at a PS ratio of 35.4x, which is significantly higher than both the Semiconductor industry average of 4.1x and its peer average of 7.8x. This premium suggests investors are expecting much steeper growth from Arm compared to its peers.

Simply Wall St’s proprietary Fair Ratio model factors in Arm’s expected earnings growth, profit margins, market capitalization, and risks to calculate a fair PS multiple of 37.0x. Since this is very close to the current PS ratio, it indicates the market is pricing Arm about right according to this measure, despite the apparent premium versus sector averages.

Result: ABOUT RIGHT

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Upgrade Your Decision Making: Choose your Arm Holdings Narrative

Narratives are powerful investment tools that help you connect the story you believe about a company with its financial forecast and fair value. They go beyond just the numbers to include your own perspective on what will drive its future.

Instead of only looking at metrics like P/E or revenue growth in isolation, a Narrative gives you an accessible way to tie together what is happening in the business (such as rapid AI data center growth or new IoT markets) with your assumptions about future revenue, profit margins, and risk. This creates a full picture of what you think the company is truly worth.

On Simply Wall St, Narratives are easy to create and compare within a global community of investors. This makes it simple to see how your story matches up, and even track how your fair value stacks against the latest price to help decide when to buy or sell.

Best of all, Narratives are dynamic. They update automatically as new news, earnings, or industry changes emerge, ensuring your investment thesis reflects the latest information rather than staying static.

For example, some investors may see Arm Holdings’ fair value as high as $210 if they believe in surging AI demand and margin expansion, while others set it as low as $80 if they expect tougher competition and slower growth. Your Narrative helps you act on the story you believe most strongly.

Do you think there's more to the story for Arm Holdings? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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