The share price of Arm Holdings(NASDAQ: ARM) rocketed higher in the first month of 2025, but the British technology company saw a significant pullback since hitting a 2025 high on Jan. 22. Arm stock has traded down 44% since then as investors pressed the panic button over multiple headwinds.
Even though Arm delivered stronger-than-expected results, the stock's expensive valuation and the economic uncertainty caused by the tariffs imposed by the Trump administration have led investors to book profits in Arm stock following the strong gains it delivered in 2024.
Does the sharp pullback that Arm saw in the past couple of months present a buying opportunity for long-term investors? Let's find out.
Artificial intelligence (AI) could give Arm Holdings a big boost
Arm doesn't manufacture any semiconductor chips of its own. Instead, it develops the technology and maintains the intellectual property (IP) that many companies and chipmakers incorporate into the design and manufacture of their chips. It charges a licensing fee from the companies developing processors using its architecture and also gets a royalty from the shipment of each chip that's manufactured using its IP.
Arm's customers include Apple, Qualcomm, Nvidia, Microsoft, Amazon, Alphabet, Samsung, Taiwan Semiconductor Manufacturing, and others. Arm dominates the market for smartphone chips, claiming that it has a market share of more than 99% in mobile application processors. That's not surprising as Arm's chip architecture has been used for developing smartphone processors by key players in the industry.
Arm is now working to make its mark in another lucrative niche. As reported by Reuters, Arm is expecting to corner a 50% share of the market for data center central processing units (CPUs) this year. That would be a big improvement over the company's 15% share of this market in 2024. This big jump in Arm's data center CPU market share can be attributed to the growing adoption of the company's architecture by the likes of Nvidia, Microsoft, Alphabet, and Amazon.
These chipmakers have been tapping Arm's chip architecture because of the lower power consumption they can achieve using Arm's designs. Nvidia's Grace server CPU, which powers the company's highly popular Blackwell systems, was designed using Arm architecture. Similarly, Amazon is designing in-house custom AI processors using Arm's IP. Even Google and Microsoft use Arm's chip architecture to make custom AI processors.
CEO Rene Haas made it clear on the company's February earnings conference call that these tech giants have been helping it gain share in the data center CPU market:
We are gaining share in the data center [sector] with AWS Graviton, Microsoft Cobalt, Google Axion, and NVIDIA's Grace Arm-based [processing] chips. AWS recently announced more than 50% of new CPU capacity installed over the past two years was on Graviton. Over 90% of AWS' top 1,000 EC2 [Elastic Compute Cloud] customers use Graviton. We have more than 20 million developers, the world's largest developer community, and we continue to increase investment in our ecosystem.
Arm is also a part of the ambitious Stargate Project that could see a massive $500 billion being poured into AI infrastructure development over the next four years. All this explains why Arm could indeed see a big jump in its cloud revenue. The company put the value of the cloud CPU market at $21 billion at the end of fiscal 2024.
The size of this market should ideally grow in the current fiscal year and beyond. However, if we assume that it remains the same in fiscal 2026 (which has just begun) and Arm indeed achieves a 50% share, its data center CPU revenue could jump significantly since customers are likely to sign more licensing deals and help the company get more royalties.
This explains why analysts expect Arm's earnings growth to accelerate following a 26% increase in the recently concluded fiscal 2025.
Arm stock's substantial pullback has made it relatively cheaper to buy right now. It is now trading at 132 times trailing earnings, down from 205 times earnings at the end of 2024. However, the forward earnings multiple of 50 points toward a significant improvement in its bottom line.
What's more, the forward earnings multiple isn't all that expensive when we consider that the U.S. technology sector has an average earnings multiple of 41. Savvy investors can consider accumulating Arm stock at this valuation as analysts are upbeat about its prospects. Arm carries a 12-month median price target of $177.50 as per 41 analysts covering the stock, which points toward potential gains of 77% from current levels over the next 12 months or so.
There is a good chance that this AI stock could indeed deliver such impressive gains thanks to its improving share of the data center CPU market, which is why buying Arm following its recent pullback could turn out to be a smart move.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
