Arm's Q3 Earnings Anticipation Masks Underlying Valuation and Risk Concerns

What happened

Arm Holdings is set to report its FY2026 Q3 earnings today, with Wall Street expecting a ninth consecutive beat at 41 cents per share on $1.23 billion in revenue. Despite projected 25.7% year-over-year revenue growth, DeepValue's analysis rates Arm as a 'POTENTIAL SELL' due to a sky-high 143x P/E multiple and 127x EV/EBITDA ratio. The report flags critical risks, including 46% royalty dependency on mature smartphones, 19% revenue exposure to China, rising RISC-V competition, and SoftBank's leveraged stake. Even if earnings meet expectations, the valuation assumes sustained mid-20s royalty growth, leaving no margin for execution errors or market headwinds. Investors must look beyond the propaganda of consecutive beats to assess whether growth can offset looming multiple compression.

Implication

A positive earnings report may briefly boost sentiment, but it does not resolve Arm's core issue of trading at 143x P/E with heavy smartphone reliance and geopolitical vulnerabilities. Long-term, the stock requires royalty growth above 20% to justify its price, necessitating flawless data-center adoption and minimal competitive erosion. Risks such as China export controls or customer shifts to RISC-V could abruptly slow growth, triggering a severe re-rating from current multiples. SoftBank's margin loans against Arm shares add technical downside risk, where stock declines could force collateral sales and amplify volatility. Thus, prudent investors should consider trimming above $145 and awaiting a safer entry near $85, as DeepValue suggests, while monitoring quarterly royalty trends and management guidance for early stress signals.

Thesis delta

The upcoming earnings report does not shift the fundamental thesis; it merely tests near-term growth against a backdrop of overvaluation and entrenched risks. A beat may offer temporary relief, but it fails to address the need for sustained high royalty growth to offset smartphone dependency and competitive threats. Conversely, a miss or guidance cut would likely accelerate the bear case, validating DeepValue's concerns and prompting a reassessment toward the $80 implied value.