• Nvidia has cut 44% of its stake in Arm, possibly signaling concern about the company’s prospects for growth.
• Arm’s latest earnings were strong, but the market was unimpressed by its forward guidance and plateauing adoption of ARMv9.
• Arm’s valuation looks stretched, and investors may want to hold off on putting money into the company until its growth trajectory rebounds.

Arm Holdings (ARM) doesn’t dominate the headlines, but its fingerprints are all over the tech that shapes our world. From the smartphones in our pockets to tomorrow’s AI-powered data centers, the company’s processors are the hidden engines driving it all. Yet despite this crucial role, its stock has a way of flying under the radar.

So, what’s going on? Over the last 52 weeks, Arm’s shares have dipped about 7%, and Nvidia (NVDA)—one of its biggest backers—just slashed its stake by 44%. Is that a sign Arm’s overvalued? Or is this just a pause before the stock makes its next big leap? Let’s dig into its valuation and examine Nvidia’s decision to cut ties was a smart move or a missed opportunity.

A quiet architect of technology

Arm has emerged as one of the most influential yet somewhat understated companies in global tech. The company, founded in 1990 and based in the United Kingdom, specializes in designing microprocessors and other semiconductor technology. Instead of manufacturing chips, it designs the architecture and licenses its intellectual property (IP) to other companies. This business model generates revenue primarily through royalties and licensing fees, not the direct sale of chips. The designs are integral to critical industries, powering everything from smartphones to data centers, and solidifying its role in the mobile and cloud markets.

Arm’s chip designs have become ubiquitous, especially in mobile devices, where it holds a dominant position. It’s estimated that 99% of “premium smartphones” worldwide use Arm-based processors, with major clients including Apple (AAPL), Samsung (SSNLF) and Qualcomm (QCOM). Beyond mobile, the company’s chips are integrated into servers, automotive technology and artificial intelligence (AI). Its ability to deliver low-power, high-performance processors has made it a go-to choice with a strong market position as demand for energy-efficient computing platforms continues to grow.

In the fall of 2023, Arm captured the market’s attention with its initial public offering (IPO). SoftBank, which owns the company, sold a portion of its stake, valuing the company at over $50 billion. That followed Arm’s high-profile involvement with Nvidia, which attempted to acquire the company for $40 billion in 2020. However, after two years of regulatory scrutiny, Nvidia was forced to abandon the acquisition attempt.

Fast-forwarding to March 2025, Arm’s valuation has surged to around $130 billion. Despite that growth, the stock has largely traded sideways over the past 52 weeks, with a slight dip during that period (~7%). The company is back in the spotlight, however, because Nvidia recently decided to divest 44% of its stake in the company. That raises questions about Arm’s valuation, given Nvidia’s earlier interest in acquiring the company.

Positive earnings, but lackluster guidance

In its earnings report last month, Arm revealed solid year-over-year revenue growth, reaching $983 million and reflecting a 19% increase from the same quarter the previous year. While this figure exceeded analysts’ expectations, the stock still declined in after-hours trading. The company’s royalty revenue, which makes up a considerable portion of its income, grew by 23% to $580 million, driven by adoption of its Armv9 and CSS technology. Its growth in royalty revenue was bolstered by rising demand in the mobile, automotive and AI markets. Despite those solid results, its earnings guidance for the fourth quarter and full-year revenue fell short of market expectations, casting a shadow over the earnings report.

While Arm’s revenue has continued to grow, the company is not inspiring enthusiasm among investors. One reason could be expectations because Arm’s performance over the last year has largely been in line with analyst forecasts but not enough to exceed them. 

Arm’s recent earnings report also highlights some trends. While growth in royalty revenue was strong, growth in licensing revenue has slowed, increasing by only 14% year-over-year. Licensing revenue tends to fluctuate because customers sign large contracts only sporadically. Analysts are closely watching the growth rate of the company’s annual contract value (ACV). Although the ACV grew by 9% year-over-year, that’s slower than the double-digit increases the company had achieved in previous periods. These mixed signals—strong royalty growth but slowing licensing revenue and ACV growth—could be contributing to the stock’s lack of momentum.

The semiconductor business, especially in the AI and cloud sectors, provides ARM a strong foundation for growth. The company supplies chips for diverse industries, including data centers and AI-driven systems, which remains a key strength. However, investors may be exercising caution because of the company’s relatively modest growth in earnings compared to other major semiconductor providers. For instance, while it grew sales by 19% in its most recent quarter, Nvidia’s sales jumped by nearly 80%.

Elevated valuation is getting harder to justify

Arm’s valuation may have gotten ahead of itself. The stock is priced for aggressive growth with a price-to-earnings (P/E) ratio of 172, well above the sector median of 30. This lofty multiple is compounded by an enterprise value-to-sales (EV/S) ratio of 37, considerably higher than the sector median of around 3, and a price-to-book (P/B) ratio of 22, which is also far above the sector’s typical 3. These elevated metrics suggest investors are betting on sustained, strong growth. However, a closer look at recent performance and broader market conditions raises doubts about whether the expectations are justified.

While adoption of the company’s Armv9 technology remains strong, growth appears to have plateaued. This may help explain why 18 of  41 analysts rate shares of Arm “hold” or “sell/underweight.” 

With Arm now valued at $130 billion, Nvidia may have concluded the upside potential is more limited—scaling back its position and recalibrating its exposure now that the possibility of acquiring the company is off the table.

It’s clear Arm’s valuation has become somewhat inflated. The stock is priced for explosive growth that simply isn’t showing up in its earnings. While Nvidia’s move may have been driven by a strategic portfolio adjustment after its failed acquisition bid, the act of trimming its position has forced investors to reassess Arm’s valuation. And when closely scrutinized, it’s difficult to disagree with Nvidia’s decision.

That said, Arm’s crucial role in the technology landscape can’t be overlooked. The company is deeply embedded in some of the most promising sectors, and its strong market position offers a solid foundation for long-term growth. If it can regain momentum—especially with increased adoption of Armv9—the stock could become more attractive.

However, until there’s a turnaround, justifying Arm’s valuation remains a challenge. For now, the shares could be stuck in neutral, suggesting there are more promising areas to invest capital. 

Andrew Prochnow, Luckbox analyst-at-large, has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader.