Arm Stock (NASDAQ:ARM) Dips Into Earnings – Will Support Step In?

Arm Holdings plc (NASDAQ: ARM) finds itself at the epicenter of the artificial intelligence revolution, a position that has fueled both market excitement and heightened scrutiny. As of today's pre-market session, ARM is trading around $158, down 1,7% in the session after a 8.19% pullback in the last five days. This movement, however, belies the significant strides the company has made in recent months, solidifying its role as a key enabler of AI innovation across various sectors.

Analysts are largely optimistic about Arm's future earnings potential, scheduled to be released tomorrow. The Zacks Consensus Estimate for fiscal year 2025 projects an earnings per share (EPS) of $1.56, representing a 22.8% increase from the previous year. Looking ahead to fiscal year 2026, EPS is projected to grow by an even more impressive 32.3%. Revenue is also expected to see substantial growth, with projected increases of 23.2% in fiscal 2025 and 23.5% in fiscal 2026.

Over the past 52 weeks, ARM’s stock price has surged by approximately 19.85%, a testament to market confidence in its long-term prospects. The stock's beta of 4.12 indicates a higher degree of volatility compared to the overall market, a factor one should carefully consider.

Arm's recent strategic initiatives underscore its commitment to capitalizing on the burgeoning AI market. The expansion of its Flexible Access licensing program to include the Armv9 edge AI platform is a particularly noteworthy development.

By offering low- or no-cost access to chip design tools and training, Arm is lowering the barriers to entry for startups and device manufacturers seeking to develop on-device AI solutions. This move not only strengthens Arm's competitive position against rivals like Nvidia and Intel but also fosters innovation within the broader AI ecosystem.

Furthermore, Arm's partnership with Meta Platforms to power AI-driven personalization systems across Facebook and Instagram highlights its growing influence in the data center space. Traditionally dominated by x86 architectures from Intel and AMD, data centers are increasingly adopting Arm-based solutions for their power efficiency and performance advantages. Meta's $1.5 billion investment in a new data center in Texas, specifically designed to support AI workloads using Arm technology, serves as a powerful validation of Arm's capabilities.

This positive outlook is reflected in recent analyst ratings. Mizuho has raised its price target for ARM to $180.00, while TD Cowen has increased its target to $175.00. Arm's latest earnings report, which showed a 12.1% year-over-year increase in revenue and reported earnings of $0.35 per share (slightly above analyst expectations), further reinforces this bullish sentiment.

While the prevailing narrative surrounding Arm is overwhelmingly positive, it is prudent to consider a contrarian perspective. The AI market, while undeniably promising, is still in its nascent stages. The current valuations of many AI-related companies, including Arm, may be pricing in excessive growth expectations. The partnerships with OpenAI and Broadcom to develop a new AI chip, slated for production in late 2026, is a future project, and is not yet guaranteed.

Furthermore, the semiconductor industry is notoriously cyclical, and a potential economic downturn could significantly impact demand for Arm's products. While Arm has made significant strides in diversifying its revenue streams, it remains heavily reliant on the smartphone market, which is facing increasing competition and saturation.

Moreover, SoftBank's aggressive investment strategy in AI, funded in part by loans secured against Arm shares, introduces an element of risk. Should SoftBank encounter financial difficulties, it could be forced to liquidate its stake in Arm, potentially putting downward pressure on the stock price.

SoftBank's recent efforts to secure a $5 billion margin loan, using Arm shares as collateral to further invest in OpenAI and related AI infrastructure, have raised some eyebrows. While SoftBank's commitment to AI is undeniable, its increasing reliance on debt to fund these ventures could potentially expose it to financial risk. Analysts have cautioned that SoftBank's aggressive lending and investment strategies could approach its 25% loan-to-value limit, potentially impacting its credit profile.