Summary

• In 2024, the S&P 500, Dow, and Nasdaq reached numerous record highs, with AI tech stocks and crypto valuations skyrocketing.

• A market correction is inevitable, presenting an excellent opportunity to invest in your favorite companies at lower valuations.

• Here's why Arm is near the top of my wish list.

Digital abstract CPU. AI - Artificial Intelligence and machine learning concept

Vertigo3d

"Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times." Niccolò Machiavelli

In 2024, the S&P 500 reached an all-time high more than 55 times, the Dow 48, and the Nasdaq 19. Crypto went crazy, and many artificial intelligence (AI) tech stock valuations have landed on the far side of the moon.

The last time the market was this cuckoo was in 2021, and we all know what happened next. There are other subtle signs that the market is overheated, such as Warren Buffett increasing Berkshire's cash hoard to more than $325 billion and not repurchasing any shares in Q3.

With that said, there are significant differences from 2021. The pandemic is over, ports aren't clogged, massive stimulus isn't being injected, interest rates aren't at zero, and inflation is back to reasonable levels (although a bit higher than the Federal Reserve's liking).

I'm not anticipating a complete 2022-style meltdown. I'm also not piling into stocks at these levels - even some of my favorite companies. History shows that the market corrects (a 10% decline) about once a year and falls 20% or more every three years or so. When the entire market drops 10%, the high flyers will fall much harder. I don't know when it will happen, but I know that it will happen, and that it will be an excellent opportunity.

Here's why Arm is near the top of my wishlist.

Arm Holdings

There is a good reason that Nvidia (NVDA) tried to purchase Arm Holdings (NASDAQ:ARM) for $40 billion back in 2020 before being stymied by regulators. Arm technology is everywhere. You are using it right now if you are reading this on your smartphone. Many laptops and computers? Arm. Cloud computing? Arm. Data centers? Arm. Gaming, vehicle systems, Internet of Things ((IoT)) - you get the idea.

Now, AI will open up an entirely new frontier for Arm. More sophisticated chips are required for high-powered AI applications, and Arm believes this will drive royalty growth for a long time:

AI-enabled devices need significantly increased compute performance yet also require energy efficiency and rapid time-to-market. Arm compute platforms enable more complex AI chips developed on faster cadences across smartphones, cloud servers, edge IoT, automotive, and networking devices. Arm's leading share across these end markets makes us uniquely positioned to benefit from the proliferation of AI from the cloud to the edge. - Arm Shareholder letter Q2 FY 2025

Arm counts all of the major tech companies as customers and is involved in major projects with them. For instance, last quarter Arm announced a partnership with Meta (META) on its large language model (LLM) Llama 3.2.

The best part is that Arm doesn't manufacture the chips, saving tons of money on capital equipment ((CapEx)). Arm designs the chip "architecture," licenses it to other companies, and collects royalties when devices are sold. More than 300 billion Arm tech-based chips have been sold to date, according to Arm.

Another terrific asset for Arm is that its new products don't immediately cannibalize older technology. As you can see below, Arm still collects hundreds of millions of dollars in royalties from legacy products.

Arm Holdings

These sales are incredibly profitable because all the spending to develop the products was done years ago.

Speaking of revenue, Arm reached $844 million in Q2 of fiscal 2025, $3.5 billion over the past twelve months, and expects $3.8 billion to $4.1 billion for the full fiscal year. As shown below, operating cash flow and free cash flow dipped slightly recently but still have quality 20% and 15% margins, respectively.

Data by YCharts

When will Arm Holdings be a good buy?

While I love the company and want to own the stock again, I'm not willing to pay the current price. By any rational metric, the stock is too expensive. Rather than list them all, here is a link to Seeking Alpha's helpful valuation page.

A picture is worth 1,000 words:

Seeking Alpha

Even the forward-looking metrics are incredibly high. For instance, Analysts expect nearly $5 billion in sales for fiscal 2026, which ends in March 2026 (more than a year away), which would still peg the valuation at 34 times sales (as of this writing).

Could the stock continue to rise in the near term? Momentum says yes, but I won't begin to accumulate shares again until there is a significant pullback. For now, the stock remains just on my wish list.