Some of the biggest beneficiaries of the artificial intelligence (AI) boom are semiconductor stocks. That includes Arm Holdings (ARM -0.81%), which plays an important role in the chip space by developing and licensing central processing units (CPUs). Although Arm may not be as highly publicized as Nvidia or Advanced Micro Devices, I would not sleep on this company.
Let's dig into Arm's business and assess why now looks like a great opportunity for long-term investors to scoop up shares.
An enormous market opportunity
Arm's total addressable market (TAM) spans many different aspects of the chip market. In particular, the company's CPUs are leveraged among applications including mobile, consumer electronics, cloud computing, networking equipment, and the Internet of Things (IoT).
According to the company, Arm has a total market opportunity of $214 billion. Currently, Arm estimates that it holds 47% market share -- up from 43% just two years ago.
Image source: Arm.
Impressive financials across the board
Considering its accelerating market position, it's not surprising to see Arm's business experiencing impressive growth. What is impressive, however, is that Arm is witnessing rising revenue while simultaneously expanding its margins.
ARM Revenue (Quarterly) data by YCharts
As seen above, the company's gross profit grew 41% year over year during the first quarter of fiscal 2025 (ended June 30, 2024). Moreover, Arm's operating margin increased 300 basis points to 19.4%.
Growing sales in a profitable way is a healthy combination, and indicates that the company has achieved optimal unit economics. If Arm can continue these dynamics, I would not be surprised to see the company acquire even more market share and become a deeper force among CPU developers.
Image source: Getty Images.
Taking a look at valuation
Valuing growth stocks can be a little tricky, and Arm is no exception. With a forward price-to-earnings (P/E) ratio of nearly 84, Arm is by no means dirt cheap.
Furthermore, as the chart below indicates, Arm stock clearly experiences quite a bit of volatility -- making finding opportune moments to buy all the more challenging. With that said, Arm's valuation multiples have been compressing for much of the last month.
ARM PE Ratio (Forward) data by YCharts
Given a mixed bag of recent economic data such as job reports, lingering inflation, and the Federal Reserve's ongoing hesitation to cut interest rates, I'm not surprised to see investors dump Arm stock and hoard some cash.
Nevertheless, the financial and operating profiles explored above suggest that Arm's premium valuation could be worth the price. Investing in Arm not only requires some discipline as it relates to abnormal volatility, but it also calls for strong conviction in the AI narrative.
Arm ended the first quarter of fiscal 2025 with $2.2 billion in remaining performance obligations (RPO) -- an increase of 29% year over year. On top of that, the company's total annualized contract value (ACV) grew 14% year over year to $1.2 billion.
I see the combination of accelerating revenue and profit margin combined with robust backlog and higher deal values as strong indications that Arm will continue benefiting from long-run secular tailwinds fueling the AI narrative.
Considering the company already has such a commanding market presence and has demonstrated that it can recognize a high degree of revenue growth in a profitable way, Arm certainly makes a compelling opportunity when it comes to chip stocks in particular.
For these reasons, I think Arm is a no-brainer buy despite its high price tag. When you think about the next decade and which companies stand to benefit from ongoing AI investments, it's hard not to see Arm emerging as a major winner.
