Arm (ARM): fair value

Fair-value band

The normal range for this name runs from $138 (cheap) to $271 (expensive); it is now priced at $186.

That is 0.4σ below this name's own normal premium.

Is Arm undervalued?

Fair, relative to its own history. Arm trades at $186, 6% below the fair value this model estimates, but it has habitually traded 3% above fair value, and today's gap is 0.4σ below that norm, within the range it normally trades in, so the verdict is Fair: priced normally for itself, not necessarily fairly valued.

Diligence checklist

5 pass · 3 fail · 3 no data

• PASSCash actually collected from profit, median of the last 3 years: 188%XBRL · Over the last three years Arm has typically got $1.88 of real cash for every $1 of reported profit, which means profits are real and not just numbers on paper. That's a good sign.
• FAILGap between paper profit and real cash: -7.6%XBRL · Arm collected more cash than it booked as profit, by 7.6% of everything it owns. That is the conservative direction, but it is far enough past my 5% line to flag: a gap this wide usually means something large and non-cash is running through the earnings, and I want to know what it is before I trust the profit figure.
• PASSDebt compared to one year of cash earnings: -2.23xXBRL · Arm holds more cash than debt, so there is no leverage question to answer here. A balance sheet in this shape can fund a bad year out of its own pocket instead of asking a lender for permission.
• FAILHow much more it earns on capital than that capital costs: -1.63ppXBRL (dealbreaker) · Arm earns 1.6 points LESS on the capital it employs than that capital costs. Every dollar reinvested here destroys value instead of creating it, which turns growth into a reason to worry rather than a reason to own the business. It has been below its cost of capital for 14 straight quarters, which is 3.5 years. That is capital destruction rather than a cheap stock, and it is where I stop work. The gap is wider than it was at the start of the window.
• FAILStock sold by executives and directors on the open market, last 6 months: $43.4MEDGAR (dealbreaker) · Collins Spencer sold $19.8M of stock in the last 6 months, outside any pre-planned selling schedule, and $43.4M went out that way in total. My rulebook says more than $5 million of this kind of selling is disqualifying for a "long" position (buying the stock). The full list of open-market sellers: Collins Spencer $19.8M, Abbey William $9.9M, Grisenthwaite Richard Roy $5.1M. A further $15.2M went out under pre-planned 10b5-1 schedules, which I don't count: those sales are set up months ahead and say nothing about what management thinks today. Options being exercised, and shares held back to cover the tax on them, are not sales and I don't count them either. filing ↗
• N/AHow long the CEO has run this company: n/aTEXT · I couldn't establish when Arm's current chief executive took the job: no 8-K item 5.02 on file.
• N/AProfit margin held up during the last sales slump: n/aXBRL · There's no revenue downturn in Arm's filed record, or gross profit isn't tagged, so this test has nothing to measure. It needs a bad patch to look at: without one, whether customers would stay through a price rise is untested rather than proven.
• PASSNormal profit margin across a full business cycle: FCF margin 22.2% vs 22.2% medianXBRL · Arm's current cash margin (22.2%) is a bit above its long-run average (22.2%). This is a mild warning rather than a problem: don't assume today's good margin lasts forever. My valuation grows the long-run average, not the temporarily high figure. Across the window the margin ran between 4.4% in March 2025 and 32.5% in September 2023.
• N/AHow much of the stock trades on an average day: $1,202MMARKET · Arm trades so much volume that this basically isn't a concern. There's no pass or fail here because the answer depends on how big a position I'd actually want to take.
• PASSShare of revenue from its single biggest customer: 16%TEXT · Arm's May 26, 2026 20-F names a customer at 16% of revenue, in its own words: "our largest customer individually, Arm China, accounted for approximately 16%, 17% and 21% of our total revenue, respectively, during those fiscal years". That's inside the quarter-of-revenue line where I stop work, but it is worth knowing whose buying decision moves the top line. filing ↗
• PASSWhether the company switched auditors in the last 2 years: noneEDGAR · Companies sometimes switch accounting auditors right before something bad is uncovered which can be a warning sign. Arm hasn't changed auditors in the last 2 years, so there's no such red flag here.