After a spectacular rally that saw Arm Holdings (ARM) stock jump more than 35% in just a month, is the best already behind us, or is this only the beginning of a longer-term ascent? Notably, the rally reflects booming demand for AI-powered technology, and Arm, a key enabler in the semiconductor value chain, has been benefiting from it. But while recent financial results are undeniably strong, the stock’s steep valuation and broader macro risks suggest the path ahead might not be as smooth.

AI Momentum Driving Strong Business Performance

Arm’s core business — designing energy-efficient chips that power everything from smartphones to data centers — has seen solid demand from the artificial intelligence (AI) revolution. As companies seek out smaller, faster, and more efficient chips to handle complex AI tasks, Arm’s architectures, particularly its newer Armv9 platform, have become increasingly attractive. This increase in demand is driving its financial performance.

For the first time in its history, Arm’s quarterly revenue surpassed $1 billion, hitting a record $1.24 billion, up 34% from the previous year. Full-year revenue crossed the $4 billion mark, with royalty income topping $2 billion.

These numbers show that Arm is thriving across diverse industries, including data centers, smartphones, automotive, and internet of things. Arm’s royalties are growing broadly across all key markets. Arm’s management noted that top hyperscalers such as Microsoft’s (MSFT) Azure, Amazon’s (AMZN) AWS, and Alphabet’s (GOOGL) Google Cloud are increasingly deploying Arm-based custom silicon to power AI workloads.

Moreover, Arm’s management expects that as much as half of all new server chips this year could be based on Arm technology. This shows the company’s solid positioning as a foundational player in the AI infrastructure space.

Arm is also making inroads in custom silicon development by expanding its offerings beyond CPUs. The company is seeing strong demand for its AI edge solutions, too. The recent launch of its first Armv9 edge AI platform is gaining traction across large industry players, providing a solid opportunity for future growth.

Moreover, the company is performing well in the mobile space. While smartphone shipments only grew 2% year-over-year, Arm’s royalty revenue from the segment jumped a whopping 30%, reflecting a significant increase in value per chip.

Looking ahead, Arm appears poised for continued growth. The company forecasts fiscal first-quarter revenue between $1.0 billion and $1.1 billion, representing a 12% year-over-year increase at the midpoint. Management is particularly optimistic about royalties, expecting 25% to 30% growth in that segment alone. However, licensing revenues may face more difficult year-over-year comparisons due to a strong performance in the same period last year. Even so, Arm anticipates adjusted earnings to land between $0.30 and $0.38 per share, higher than the EPS of $0.26 it reported in the prior-year period.

Valuation Concerns and Market Risks

Still, despite the company’s strong fundamentals and strategic positioning, the investment case becomes less attractive when looking at valuation. Arm stock trades at a forward P/E of 104.47x and a P/S ratio above 35x. These high multiples suggest investors are pricing in extremely optimistic growth assumptions. At such high valuations, the stock is vulnerable to minor disappointments, whether in earnings, guidance, or macroeconomic developments.

Risks also linger around global trade and economic uncertainties. Tariffs and slowing demand in its end markets could pose indirect challenges. While management believes the direct impact of tariffs will be limited, the broader macro environment remains volatile. A lack of visibility into end-market demand has led Arm to withhold full-year guidance, which will hurt investor sentiment.

The Bottom Line on ARM Stock

Arm is in a strong position to continue benefiting from AI-driven trends, and its technology is becoming central to the future of computing. Yet, with the stock already priced for near perfection, any hiccups could trigger sharp reactions from the market.

Wall Street analysts maintain a “Moderate Buy” rating, reflecting cautious optimism. The rally may not be over, but from here, the margin for error is significantly slimmer.