More expensive than NVIDIA! Arm's high valuation faces a major test with its financial report

According to the Zhitong Finance APP, chip design company Arm Holdings (ARM.US) will announce its earnings report after the U.S. stock market closes on Wednesday, facing a critical test of its upward momentum.

Arm has risen nearly 90% this year, making it one of the most expensive stocks in the market. The market expects the company's revenue for the second fiscal quarter to grow by only 0.6%, far from the explosive growth trend of other artificial intelligence (AI) companies.

Dan Morgan, senior portfolio manager at Synovus Trust, stated, "Ultimately, Arm is a company with a price-to-earnings ratio far exceeding that of Nvidia (NVDA.US), but without the same growth rate as Nvidia. It plays a crucial role in all the new technologies involved in chip manufacturing, and the momentum of AI development is very strong, but I don't know if we can prove that its growth rate justifies its price-to-earnings ratio."

Arm's expected price-to-earnings ratio exceeds 76 times, ranking third among the Nasdaq 100 constituents, higher than Nvidia's 37 times. Arm's price-to-sales ratio exceeds 32 times, the highest in the index to date.

David Trainer, CEO of investment research firm New Constructs, remarked, "Valuation investors may not be accurately judging Arm, so it wouldn't be surprising if this earnings report serves as a real correction." He added, "Arm needs to achieve significant profit growth over the next few years to justify this valuation." He pointed out that Arm is in a "highly competitive industry."

Analysts have mixed views on Arm. According to Bloomberg data, more than half of analysts have given the stock a "buy" rating, but the average target price implies less than a 2% increase in the stock over the next 12 months.

Bernstein analyst Sara Russo downgraded Arm's rating to "underperform" last week. She stated, "The long-term outlook remains very attractive, but what about the price?" Given the stock's strong performance and valuation this year, "we find it hard to identify upside potential."

She added that while Arm's AI-related business is "performing well," considering the cyclical headwinds, "we are concerned about revenue from non-AI-related businesses."

Long-term bulls believe that Arm's valuation will gradually rise over time. However, the company failed to raise its annual sales forecast last quarter, which was disappointing. Data shows that Arm's revenue for fiscal year 2025 is expected to grow by 23%, and by 24% in fiscal year 2026. This fiscal year's net profit is expected to nearly double, but growth will slow in the following years.

Another potential issue is that Arm is canceling a license that allowed long-term partner Qualcomm (QCOM.US) to use its intellectual property to design chips. This issue has recently pressured the company's stock price and may be mentioned during the earnings call.

Despite recent risks, Wall Street remains very optimistic about AI stocks overall. Recent earnings reports from large tech companies have confirmed their commitment to investing heavily in this technology, a trend that may continue for companies like Arm. UBS expects AI-related spending by large tech companies to grow by 50% this year, reaching $222 billion, and to increase by another 20% by 2025 Daniel Newman, CEO of The Futurum Group, stated: "People want to see the enthusiasm for artificial intelligence translate into actual business volume, and things are moving in the right direction."

"There are reasonable doubts in the market about when Arm can reach the performance level corresponding to its valuation. But I am not worried; it is just a matter of time."