Arm Holdings Stock Before Q2 Earnings: To Buy or Not to Buy?

Arm Holdings plc ARM will report its second-quarter fiscal 2025 results on Nov. 6, after the bell.

The Zacks Consensus Estimate for earnings in the to-be-reported quarter stands at 25 cents, indicating a 30.6% year-over-year decline. The consensus mark for revenues is pegged at $808.9 million, indicating a marginal year-over-year increase. There has been no change in analyst estimates or revisions lately.

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The company has an impressive earnings surprise history. Earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an earnings surprise of 22.2%, on average.

ARM Holdings PLC Sponsored ADR Price and EPS Surprise

ARM Holdings PLC Sponsored ADR price-eps-surprise | ARM Holdings PLC Sponsored ADR Quote

What Our Model Says

Our proven model doesn’t conclusively predict an earnings beat for ARM this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

ARM has an Earnings ESP of 0.00% and a Zacks Rank #3.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Shaping Upcoming Results

ARM leverages AI to develop sophisticated chip designs and software tools utilized in smartphones, automobiles, and data centers. Major semiconductor manufacturers like Apple AAPL, Nvidia NVDA and Qualcomm QCOM rely on ARM’s chip designs. We expect continued top-line strength in the to-be-reported quarter, driven by both Royalty and License revenues. However, revenue growth will be slow year over year mainly due to the timing of revenue recognition from licensing.

ARM had forecasted around 20% year-over-year growth in Royalty revenues for the quarter, anticipating a higher adoption of Armv9, which typically commands double the royalty rates compared to Armv8 products. Royalty revenues have been boosted by the resurgence of the smartphone market and increased market share outside mobile.

Price Dynamics

ARM has rallied a massive 88.2% year to date and 28.1% over the past three months. This massive rally has sent the stock to a higher valuation. If we look at the forward 12-month Price/Earnings ratio, ARM shares currently trade at 75.65X forward earnings, well above the industry’s 38.13X.

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Investment Considerations

ARM’s revenue growth has been modest over the past few years. However, this trend may shift in the future due to the current environment where AI hype is a significant driver of sales for any company involved in the technology, and ARM Holdings is no exception.

For relatively new public companies like ARM, margins are often squeezed initially. Despite the company’s excellent gross margins, this hasn’t yet translated into strong operating margins. The increased costs in the R&D segment could be beneficial in the long term, suggesting potential for future growth and innovation.

Wait for a Better Price

Given the stock’s substantial increase over the past year, it may experience a correction soon. Therefore, it might be wise for investors to wait for a potential correction.

While ARM remains fundamentally strong, a more advantageous entry point could emerge if the stock undergoes some price adjustment. The company’s robust position in the AI hardware market and its strategic advancements in chip design suggest long-term growth potential, but timing the market entry is crucial for maximizing investment returns.

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