ARM Q3 Earnings Beat Masks High Valuation and Structural Risks

What happened

ARM Holdings reported Q3 earnings that beat estimates with a 26% year-over-year revenue jump, lifting shares and reinforcing confidence in near-term growth. However, the DeepValue report highlights that ARM trades at extreme valuations of 143x P/E and 127x EV/EBITDA, pricing in sustained mid-20s royalty growth with little error margin. Critical risks include overreliance on mature smartphone markets (46% of royalties), high customer concentration, rising RISC-V competition, and SoftBank's margin loans secured by ARM shares. Margin pressure noted in the earnings suggests rising costs that could compress profitability despite top-line strength. Thus, while the beat is positive, it does not address the underlying overvaluation and structural challenges that threaten long-term returns.

Implication

The strong Q3 results validate ARM's growth trajectory, yet the stock's premium multiple leaves minimal room for error, requiring sustained royalty growth above 20% to justify prices. Headwinds from smartphone dependence, customer concentration, and RISC-V competition persist, while margin pressure indicates rising costs that could erode earnings. SoftBank's collateralized shares add technical downside risk, amplifying volatility independent of fundamentals. Although the business is performing well, the risk/reward at current levels remains unfavorable, aligning with the DeepValue 'POTENTIAL SELL' rating. Consequently, new buyers should wait for a more attractive entry near $85 where risks are better priced.

Thesis delta

The Q3 earnings beat reinforces ARM's growth narrative but does not mitigate the core thesis concerns of extreme valuation and significant risks. Valuation multiples remain elevated, and underlying pressures from competition, concentration, and SoftBank's leverage persist unchanged. Therefore, the thesis remains a 'POTENTIAL SELL' with no material shift, as the positive news is insufficient to alter the high-risk profile.