Leading semiconductor designer ARM Holdings (NASDAQ:ARM) stock remains a top chip pick many investors are watching right now.
To some, this company appears to be significantly overvalued, with a price-earnings ratio of 568-times and a high PEG ratio of 6.9.
Its intrinsic value estimates also vary, though it should be noted the run ARM stock has been on is indicative of improved growth expectations in the chip sector.
The company’s focus is on providing unique IP to the semiconductor segment. Those looking to manufacture chips often need to go through Arm in one way or another.
Thus, the company’s growth prospects really do align with the market giants in this space.
With the run Nvidia (NASDAQ:NVDA) and its peers have been on, this is clearly an even more meta picks-and-shovels play in the chip space many bulls are looking at.
Here are the arguments for and against this megacap chip stock right now.
The Nasdaq 100 and ARM Stock
On June 24, Arm surged on news that this stock has been included in the Nasdaq 100 index. Arm replaced Sirius XM Holdings (NASDAQ:SIRI) across several Nasdaq 100 indexes.
Nine months after Arm Holdings debuted on the market with the largest U.S. IPO since 2021, its American depositary receipts have continued to rocket higher.
The company’s share price has surged from its $51 per share offer price to more than $163 per share at the time of writing.
That’s a nice triple-up for investors in less than a year, and certainly warrants this inclusion in my view.
Excellent Growth Progress
Arm Holdings wasn’t cheap at its September IPO, trading flat until February. Positive catalysts since then drove its valuation sky-high.
The company currently trades at around 554-times trailing 12 months GAAP earnings, 185-times GAAP forward earnings, and 103-times non-GAAP forward earnings. This starkly contrasts with sector norms, suggesting it may be overvalued for now.
That said, on a sector-wide basis, this stock doesn’t look overly expensive. Analysts have remained bullish on this stock, in part because of the strong growth prospects seen in the data center, PC, IoT, and automotive sectors.
Its market dominance in mobile and IoT, coupled with AI-driven opportunities, underscores its potential as a global computing leader with strong revenue growth and high margins (95.2% gross profit margin).
Arm Holdings stock surged over 40% in February on optimism about AI, driven by quarterly results exceeding Wall Street expectations. If this AI surge continues, ARM stock could clearly be a key beneficiary.
Also Invested in AI
ARM stock surged over 6% following reports that the company, known for designing chips for various applications including AI, outlined plans to develop its own AI chip division.
The division aimed to create its first prototype by 2025. It remains unclear whether this initiative will result in a new stand-alone entity or be integrated within Arm under its parent company, SoftBank (OTCMKTS:SFTBY).
Arm, seen as SoftBank’s key asset, also has plans to enter data center construction by 2026, focusing on renewable energy and leveraging its own chip technology.
Arm’s recent AI advancements promise improved performance in AI, computing, and graphics. CEO Rene Haas projected 100 billion AI-ready Arm devices by 2025, boosting investor confidence.
ARM Stock Looks Like a Buy
Right now, I have to side with analysts on Arm Holdings. ARM stock does certainly look expensive, and there’s no getting around that.
From a momentum perspective and in terms of robust long-term growth catalysts, there are few companies out there with the sort of tailwinds Arm has.
I view this stock as an overarching way to play growth in the chips sector. For those looking to do so, I think the company’s recent addition to the Nasdaq 100 and other key AI-related catalysts could propel strong performance over the next year at least.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
