Nvidia (NVDA -3.26%) first disclosed a stake in fellow semiconductor company Arm Holdings (ARM -5.59%) in the fourth quarter of 2023. The position was valued at $147 million at the time, but a recently filed Form 13F shows the position is now worth more than $280 million and accounts for about 65% of Nvidia’s $433 million stock portfolio.

To be clear, Nvidia has not added to its stake this year. Instead, Arm shares have surged on expectations that the company will benefit from artificial intelligence (AI). In fact, the stock has advanced more than 150% over the last 12 months. But Nvidia evidently sees more upside, and that should carry weight with investors. Nvidia is the most valuable semiconductor company in the world, so it knows a thing or two about making chips.

However, Wall Street is also relatively optimistic where Arm is concerned. Among the 41 analysts who follow the company, the stock has a median target price of $160 per share, which implies 18% upside from its current share price of $136. That said, only about half of the analysts who follow Arm actually have a buy rating on the stock.

Ultimately, investors have a tough decision. On one hand, Arm has been gaining share in key semiconductor markets, and the company should benefit as demand for AI infrastructure increases. On the other hand, Arm stock looks relatively expensive at its current valuation. Read on for more details.

Arm is gaining market share in key semiconductor categories

Arm is a semiconductor company that does not sell semiconductors. Instead, it develops central processing unit (CPU) architectures and licenses the intellectual property (IP) to other companies. Customers like Apple, Amazon, and Microsoft use Arm-based chips in everything from mobile devices and laptops to data center servers and industrial sensors.

Arm has also introduced compute subsystems that package its CPU designs with adjacent building blocks engineers need to develop chips for data center servers, mobile devices, and personal computers (PCs). Arm also provides software development tools that let programmers write applications for its chips, including code libraries for artificial intelligence and machine learning.

Importantly, Arm has long dominated the smartphone market due to its energy-efficient architectures. In fact, Arm processors are present in 99% of smartphones. But the company has recently made strides in boosting chip performance, helping it gain share in PCs and data centers, markets traditionally dominated by Intel and AMD.

Indeed, Apple has already shifted its MacBooks to Arm processors, and CEO Rene Haas expects the company to have 50% market share in Windows PCs by 2029, up from about 11% today. Additionally, 10 of the world’s largest hyperscale cloud companies use Arm-based CPUs in their data centers. Consequently, Arm’s market share in cloud computing has increased six percentage points to 15% over the last three years.

Image source: Getty Images.

Arm stock trades at a relatively expensive valuation

Arm exceeded its guidance in the fiscal 2025 Q2, which ended Sept. 30., but its overall financial performance was lackluster. Total sales increased 5% to $844 million on strong growth in royalty revenue, offset by a decline in licensing revenue that management attributed to “normal fluctuation in timing and size” of license agreements. Meanwhile, non-GAAP net income decreased 17% to $0.30 per diluted share.

Looking ahead, Arm could be a major beneficiary from the AI boom. Its licensing-based business model lets customers outsource a portion of chip-related R&D expenses, while simultaneously affording them the flexibility to develop custom silicon tailored to their specific needs. Neither Intel nor AMD offers the same flexibility. So, Arm has been gaining share across various semiconductor verticals, and there is no reason to think that will change.

However, Wall Street expects Arm’s adjusted earnings to increase at 33% annually through fiscal 2026, which ends in March 2026. That makes the current valuation of 100 times adjusted earnings look expensive but not outrageously expensive. Personally, I think risk-tolerant investors comfortable with volatility can consider buying a small position today. But I also believe there will be more attractive buying opportunities in the future.