• Arm turned in solid earnings results, posting record revenue.

• The company saw solid growth from Chinese smartphone makers as well as continued strides in the data center.

• The stock is a bit pricey, but it has a very attractive business model.

Share prices of Arm Holdings slipped despite the company posting record fiscal Q3 revenue. However, the stock is still off to a strong start to the year, up nearly 32% year to date.

Let's take a closer look at the semiconductor company's most recent results to see if the dip in price is a buying opportunity.

Strong AI demand

Arm is currently still tied to the smartphone market, as its technology is incorporated into nearly all advanced smartphones in the world. However, its technology has also started to make inroads into the data center as well. At the same time, its new Armv9 technology carries a much higher royalty rate than its older v8 technology, including being about double for Compute Subsystems (CSS), which helps with artificial intelligence (AI) workloads on edge devices and in data centers.

Arm does not design its own chips; instead, it licenses its technology. Historically, it generates revenue via royalty payments, for which it collects per-unit royalties based on the number of chips shipped that use its designs. More recently, it has been collecting license revenue via subscriptions to its intellectual property (IP) portfolios. Both arrangements carry very high gross margins.

For its fiscal 2025's Q3, Arm's revenue climbed 19% year over year to a record $983 million. Adjusted EPS, meanwhile, jumped 26% to $0.39. Those results were well ahead of analyst expectations for adjusted EPS of $0.34 on revenue of $949 million, as compiled by FactSet.

Royalty revenue in the quarter soared 23% to $580 million. It credited the jump to strong adoption of its Armv9 technology, increased usage of its chips in data centers, and an improvement in the Internet of Things ( IoT ) space. The company called out the Dimensity 9400 chip used in flagship smartphones from Chinese companies Oppo and Vivo as being a driver. Meanwhile, in the data center market, it called out Amazon's Graviton CPU (central processing unit) as being a solid contributor.

License revenue, meanwhile, increased by 14% year over year to $403 million. It signed one additional Arm Total Access agreement in the quarter, bringing the total to 40. It also added several customers to its Arm Flexible Access program, ending the quarter with 295 customers.

Remaining performance obligations (RPO), which is the combination of deferred revenue and backlog and an indicator of future revenue, fell 3% sequentially to $2.33 billion. It expects to recognize 28% of this amount as revenue over the next 12 months.

Looking ahead, Arm narrowed the range of its full-year guidance. It now expects adjusted EPS of between $1.56 to $1.64 on revenue of $3.94 billion to $4.04 billion. It previously had guided for adjusted EPS of $1.45 to $1.65 on revenue of $3.8 billion to $4.1 billion.

For fiscal Q4, Arm forecast adjusted EPS of between $0.48 and $0.56 on revenue of $1.175 billion to $1.275 billion. Analysts were looking for EPS of $0.53 on revenue of $1.22 billion.

The company is excited about the $500 billion announced Stargate data center project, where it said it would be the CPU of choice for the initial configurations. It said the overall use of Grace Blackwell GB200s, which combined a Nvidia GPU (graphic processing unit) with an ARM-based CPU, will be an accelerant for data center growth.

Image source: Getty Images

Is it time to buy Arm Holdings stock?

Arm turned in a solid quarter. It continues to see solid uptake of its new higher royalty Armv9 technology, while it is doing well in China, which represented about 25% of its revenue in the quarter. It expects this to go back down to the mid-teens in the future, but its success with Chinese smartphone makers is a positive, as they have gained share versus Western brands in the country.

The Stargate project is a nice opportunity for the company, and the growing relationship between its parent company, Softbank, and OpenAI can be of benefit as it looks to make further inroads into the data center. The company already has designs with Amazon's Graviton, Nvidia's Grace Blackwell, and Microsoft's Cobalt, so it is making progress.

Meanwhile, with its Armv9 technology still around 25% of its total royalty revenue, it still has a nice opportunity to continue to grow this part of the business. It thinks v9 penetration can eventually reach 67% to 70% of total royalties.

Looking at valuation, Arm trades at a forward price-to-earnings (P/E) ratio of over 80 based on fiscal 2026 analyst estimates.

Data by YCharts.

That's a high valuation, but the company has generally traded at a premium given its high-margin royalty and license-based business model that often sees royalty revenue streams that last a decade or even more. At the time of its September 2023 IPO, it noted that nearly half its royalty income was coming from Arm products released between 1990 and 2012.

Over the long term, I believe that Arm's stock should continue to be a solid winner, but with the stock's strong start to the year, I would not chase it here, even after this small pullback.