Arm Holdings Navigates Valuation Scrutiny Amid Rising China RISC-V Competition
Despite an 11% stock gain over three months, Arm Holdings is facing investor caution due to significant valuation concerns, a deteriorating earnings outlook, and increasing competitive threats from the open-source RISC-V architecture in its crucial Chinese market.
U.S. equity markets have observed varied performance within the technology sector, with specific focus on Arm Holdings plc (ARM), a prominent semiconductor intellectual property provider. While ARM shares have advanced by 11% over the last three months, this performance significantly lags the broader semiconductor industry's robust 20% growth during the same period, prompting analysts and investors to re-evaluate its near-term prospects.
The Event in Detail: Underperformance Amidst Core Strengths
ARM's foundational strength lies in its power-efficient chip architectures, which are integral to its leadership in mobile computing. Its designs underpin energy-saving devices from industry giants such as Apple (AAPL), Qualcomm (QCOM), and Samsung, solidifying its position as a cornerstone of modern mobile technology. Furthermore, ARM is increasingly pivotal in the burgeoning Artificial Intelligence (AI) and Internet of Things (IoT) sectors, where its flexible and energy-efficient architecture supports the growing demand for embedded AI models and edge computing.
However, this technological leadership is contrasted by notable headwinds. Over the past 60 days, analysts have issued four downward revisions to ARM's fiscal 2026 earnings estimates, with no upward adjustments, resulting in a 2% drop in the Zacks Consensus Estimate for earnings. This trend signals growing concern over the company's ability to meet prior expectations amid evolving industry dynamics.
One significant risk factor is ARM's substantial exposure to China, its second-largest market. While China contributed almost 19% of ARM's total revenues in fiscal year 2025, amounting to $749 million, sales growth in the region was a sluggish 7.5% year-over-year. This slowdown is largely attributed to the accelerating adoption of RISC-V, an open-source chip architecture, increasingly favored by Chinese firms. The Chinese government is actively preparing to issue formal guidelines to promote RISC-V development and widespread use, indicating a strategic push for self-sufficiency in chip technology.
Analysis of Market Reaction: Valuation and Competitive Pressures
Investor caution around ARM stems primarily from its premium valuation coupled with a deteriorating earnings outlook and competitive threats. The stock trades at approximately 79.61 times forward 12-month earnings per share, substantially higher than the semiconductor industry average of 39.63 times. Similarly, its trailing 12-month EV-to-EBITDA ratio stands at around 124.33 times, far exceeding the industry average of 22.32 times. This high valuation leaves limited room for performance missteps.
The cautious sentiment intensified following ARM's weaker-than-expected fiscal 2026 guidance issued in May 2025. Despite exceeding some fourth-quarter fiscal 2025 earnings estimates, the company projected fiscal 2026 adjusted earnings per share in the range of $1.56 to $1.64, significantly below the $2.03 analyst estimate. Fiscal 2026 revenue guidance was also set lower, between $3.94 billion and $4.04 billion, against an analyst estimate of $4.91 billion. This subdued outlook, partly influenced by "unpredictable market signals, partner caution, and potential macroeconomic disruptions," including tariff-related uncertainties, contributed to a notable decline in ARM's stock price.
Broader Context and Implications: China's Strategic Shift
ARM's underperformance highlights a broader shift in the global semiconductor landscape. China's strategic push for RISC-V is not merely a cost-saving measure but a concerted effort to foster a robust, self-sufficient chip design ecosystem aligned with national security and economic priorities. The Chinese market is forecasted to account for approximately 25% of global RISC-V revenues by 2030, posing a long-term vulnerability for ARM's licensing-based business model, which has historically boasted extremely high gross margins (97% in FY2025).
Additionally, ARM's reported transition into hardware with the introduction of its own CPUs presents a double-edged sword. While this move could expand its total addressable market, it risks alienating top customers, who accounted for 56% of its FY2025 revenues. Direct competition with these key partners could potentially undermine future licensing revenue growth and impact its highly profitable royalty-based business model.
Expert Commentary: Awaiting Clearer Growth Visibility
Given the confluence of factors, Zacks Investment Research currently maintains a "Hold" rating on ARM stock. One analyst reiterated a "sell" rating, setting a price target of $74, implying a 47% downside from its current valuation of approximately $140.63. This reflects a consensus among some analysts that the current valuation does not fully account for the mounting risks and challenges facing the company.
> "Investors should hold ARM for now, awaiting clearer growth visibility before considering further exposure," advises one analyst, reflecting the prevailing cautious sentiment.
Looking Ahead: Key Factors to Monitor
Going forward, investors will closely monitor several key factors. The pace of RISC-V adoption in China and the extent of Chinese government support will be critical indicators of its potential impact on ARM's market share. The strategic implications of ARM's hardware development initiatives, particularly how they affect relationships with existing customers and its gross margins, will also be under scrutiny. Furthermore, upcoming economic reports, particularly those related to global technology demand and geopolitical trade policies, will continue to influence ARM's trajectory. Until there is greater clarity on these fronts, ARM's stock may experience continued volatility.
