During its brief tenure as a public company, the semiconductor giant Arm holds (NASDAQ:ARM) benefited from a sharply rising stock. After starting with an IPO (IPO) price of $51 per share last year, Arm hit a 52-week high of $188.75 in July.

The price has fallen since then, but shares are still up nearly 100% in 2024. Its stock performance is understandable since Arm’s business is booming, posting record revenues for four straight quarters.

Can the company continue to increase sales? If so, given the high stock price, does it make sense to invest in the semiconductor chip designer? To find an answer, let’s dissect Arm to determine if it’s a good long-term investment.

Arm’s technological strengths

Arm’s success lies in the design of its semiconductor chips. The company dominates the mobile device market with more than 90% market share thanks to the energy efficiency of its chips.

This is just the beginning. Arm’s energy-efficient chip designs are increasingly in demand across a growing number of devices. This encompasses the Internet of Thingssmart cars and much more, which bodes well for the company’s future.

Arm’s technology is used by the biggest names in technology. He is employed by Nvidia in its semiconductor products, by Amazon Web Services (AWS) in cloud computingand in AlphabetGoogle-owned consumer offerings including Pixel mobile phone and Nest smart home solutions.

With the advent of power-hungry artificial intelligence systems, Arm’s power-saving chip designs are also in high demand. Management described current market conditions by saying: “The substantial power requirements of AI are driving the growth of Arm’s compute platform, which is the most energy-efficient solution available. »

This brings me to a key factor in the company’s future success: its latest chip architecture, Armv9. The company recognized the need for a new chip platform to support AI processing demands and launched Armv9 in 2021. The Armv9 architecture enables AI to quickly process quantities massive amounts of data needed to accomplish tasks while remaining energy efficient.

Adoption of Armv9-based chips is growing, and as a result, Armv9 accounted for 25% of the company’s $939 million in sales during the fiscal first quarter ended June 30.

Arm’s Approach to Revenue Generation

Arm generates revenue in two main ways. First, it licenses its semiconductor product designs. Then, she receives royalties on these creations, even years after the sale has been concluded. For example, it continues to accrue royalties on products developed in the 1990s.

The inherent complexity of Armv9 means that it generates higher royalties than previous generations of Arm architectures. This helped the company’s first-quarter royalty revenue increase 17% year-over-year. Meanwhile, AI-driven demand for energy-efficient, high-performance chips helped Arm increase its first-quarter licensing and other sales by a jaw-dropping 72%, year to year.

With the advent of the AI ​​era, management expects continued revenue growth. For its 2025 fiscal year, the company expects annual revenue to be between $3.8 billion and $4.1 billion. This is an increase from its fiscal 2024 revenue of $3.2 billion.

To Buy or Not to Buy Arm Holdings Stock

Arm’s dominance in the mobile market, growing adoption of its Armv9 architecture, and projected revenue growth for fiscal 2025 all make it a worthwhile investment.

The tougher question is whether now is the right time to buy Arm stock. The stock fell on October 23 as the company struggled a dispute. Could this create an opening for purchase?

Looking at the arms price/earnings ratio The (P/E) ratio, a widely used measure of stock valuation, tells you how much investors are willing to pay for a dollar of earnings. Comparing it to other semiconductor companies, such as Nvidia, BroadcomAnd Advanced microdevicesallows you to assess whether Arm stock is too expensive.

Data by Y Charts.

Arm’s P/E multiple is much higher than other stocks in the sector, suggesting that its stock is still overpriced. Wall Street analysts have a consensus stock price target of around $143 for Arm stock. While the stock closed at $143.75 on October 25, Wall Street seems to agree that the current stock price is still too expensive despite the recent decline.

So while Arm is a company to consider investing in for the long term, given the high stock price right now, it’s best to wait until the stock falls further before deciding to buy.

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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 board of directors of The Motley Fool. Robert Izquierdo holds positions in Advanced Micro Devices, Alphabet, Amazon, Arm Holdings and Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Amazon and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.