Should You Buy ARM Stock? The Numbers vs. The Reality Check

Arm Holdings’ second-quarter fiscal 2026 results tell a compelling story of technological dominance, yet the market’s tepid response reveals a different narrative altogether. Following announcement of record-breaking earnings, the stock retreated approximately 7%, signaling investor skepticism despite strong operational execution. The question isn’t whether ARM is a good company—it clearly is—but whether current valuations leave room for meaningful returns.

Execution Excellence Masks Growing Valuation Concerns

The numbers themselves are undeniably impressive. ARM generated $1.14 billion in quarterly revenue, representing 34% year-over-year growth and surpassing analyst expectations by 6.5%. This marks the third consecutive billion-dollar quarter, cementing the company’s position as a critical infrastructure player in the AI revolution.

Digging deeper into the revenue streams reveals why institutional investors remain genuinely interested despite price declines. Royalty income jumped 21% annually to $620 million, driven by widespread adoption of ARM’s computing architecture across multiple sectors. The standout performance came from data center royalties, which doubled as major hyperscalers increasingly deployed Arm-based custom silicon solutions. With over one billion Neoverse CPUs now in circulation, the company has established itself as the preferred architecture for energy-efficient, high-performance computing.

Licensing revenues painted an equally bullish picture, surging 56% to $515 million as chipmakers worldwide race to incorporate ARM designs into next-generation AI systems and processors. This dual growth engine—licensing plus royalties—demonstrates that ARM isn’t merely riding the AI wave but actively shaping it.

Why the Stock Declined Despite Strong Earnings

The disconnect between business momentum and stock performance hinges on three factors: valuation expectations, reinvestment intensity, and market maturity concerns.

ARM’s forward price-to-sales ratio stands at 28.52, compared to the semiconductor industry average of 7.78. This 3.6x premium suggests the market has already priced in years of exceptional growth. When a company trades at multiples this elevated, even strong quarterly results can trigger profit-taking if they fail to exceed the already-lofty expectations embedded in the share price.

Operating margins tell another story worth monitoring. Non-GAAP operating income increased 43% to $467 million, with margins reaching 41.1%—an improvement from 38.6% the prior year. However, research and development spending accelerated 31% to $648 million as ARM invests heavily in next-generation architectures, compute subsystems, and chiplet design capabilities. While essential for maintaining technological leadership, this spending trajectory raises questions about margin sustainability if revenue growth eventually normalizes.

Non-GAAP earnings per share came in at $0.39, exceeding guidance by $0.06, but forward guidance for Q3 projects only 25% year-over-year revenue growth—a notable deceleration from the current 34% pace. Management expects licensing to grow 25-30% while royalties increase just over 20%, signals of a maturing growth phase.

The Partnership Playbook: Why Technology Leadership Alone Isn’t Enough

ARM’s ecosystem expansion demonstrates why the company remains strategically indispensable, yet this strength hasn’t prevented valuation compression. Recent partnerships with major technology platforms illustrate the company’s reach: Meta collaboration on AI efficiency, NVIDIA’s Grace processors, AWS Graviton chips, Google’s Axion, and Microsoft’s Cobalt all leverage ARM’s architecture.

Google’s Axion exemplifies the value proposition—delivering 65% better price performance while consuming 60% less energy. Yet the proliferation of ARM-based custom silicon also suggests commoditization risks. When every hyperscaler builds proprietary chips using your architecture, you’ve won the architectural battle but potentially limited your pricing power.

The launch of Lumex CSS (Compute Subsystem), marketed as ARM’s most advanced mobile platform, targets real-time on-device AI applications. OPPO and Vivo have committed to shipping Lumex-powered devices, validating market demand. Still, mobile computing has matured significantly, and new platform adoption cycles take time to translate into meaningful revenue expansion.

The Valuation Reality Check

Here’s where caution becomes warranted. ARM trades at a valuation that assumes sustained mid-to-high 30% growth rates indefinitely. The forward guidance of 25% growth, while respectable, represents the first meaningful deceleration signal. For a company already priced for perfection, any slowdown triggers sharp repricing.

The company’s Zacks Rank #4 (Sell) rating reflects this dynamic. The investment community acknowledges ARM’s technological superiority and market relevance, but the risk-reward at current prices favors waiting for either: (1) a significant pullback enabling better entry, or (2) clearer evidence that licensing and royalty growth can accelerate beyond current guidance.

The Investor’s Dilemma

ARM remains an extraordinarily well-executed company operating in the fastest-growing tech segment. Its technology is embedded across smartphones, data centers, edge devices, and automotive systems. The business model—generating recurring revenue through licensing and royalties—provides structural stability.

However, investors face a straightforward reality: the stock’s valuation leaves virtually no margin for error. A single quarter of guidance disappointment, competitive pressure from alternative architectures, or macroeconomic headwinds affecting capex spending could trigger substantial repricing.

For risk-conscious investors, the appropriate stance is patience. Watch for either a 20-30% stock pullback that makes valuation more reasonable, or wait for Q3 results and management commentary to confirm that deceleration is temporary rather than structural. Until one of those conditions materializes, ARM is best approached cautiously despite its undeniable quality and market importance.