The artificial intelligence boom that has captivated Wall Street and sent related stocks soaring came back down to earth on Tuesday, as shares of chip designer Arm Holdings suffered their biggest one-day decline ever.
Arm’s stock price plummeted 19.4%, wiping out over $23 billion in market value. The previous largest percentage drop for Arm’s stock was 9.8% on October 25, 2022, the day it began trading again after being taken private by SoftBank in 2016.
Despite the huge decline, Arm remains one of the most valuable semiconductor companies in the world, with a market capitalization of $123 billion. That places its valuation above established chip makers like Micron and Analog Devices as well as industrial giants like Boeing and UPS. Only last week, Arm’s market cap stood at $146 billion, fueled by investor enthusiasm for its role in AI chips.
The U.K.-based company develops chip architectures and designs that are licensed and customized by other semiconductor firms. Its technology powers over 90% of smartphones globally, including Apple’s iPhone. But investors have become most excited by Arm’s potential in server CPUs and AI accelerators, segments with massive growth runways as artificial intelligence is embedded into more enterprise and consumer applications.
Arm positively surprised analysts when it reported earnings last Wednesday, beating estimates and providing an upbeat forecast that showed strong demand across its product portfolio. However, the stock’s subsequent rally, which saw shares nearly double in three days, appeared overdone.
Given big recent moves for Nvidia’s stock and shares of several other names linked to the AI boom, investors appeared not to want to miss the boat if Arm turned into the next hot AI-stock play,” wrote analyst Kinngai Chan of Mizuho Securities in a note to clients this week. “But the explosive gains in prior sessions signaled valuation was getting ignored.”
With Arm trading at over 50 times estimated 2023 earnings even before the recent pops, traders were primed to take profits. The catalyst came Tuesday as technology stocks fell broadly amid a risk-off mood in markets. The tech-heavy Nasdaq dropped over 2% while the S&P 500 declined 1.4%.
Arm’s decline reflects a cooler attitude towards AI as the reality sets in that commercial viability remains years away. Nvidia, a leader in AI chips, has fallen over 20% from its January highs. And AI startups like Anthropic and Cohere are shying away from the immense funding rounds and lofty valuations that defined 2022, as access to capital tightens.
Still, the AI trend remains strong, with companies like Google, Microsoft, Meta and Baidu investing billions to be ready for an AI-powered future. Arm is well positioned to ride the wave given its pivotal role supplying intellectual property for AI accelerators and server processors. Its diverse customer base shields it from reliance on any one firm, even as Apple accounts for nearly half its royalty revenue.
As the hype deflates, investors will need to take a measured approach in evaluating AI stocks, including Arm. While its long-term prospects appear bright, headwinds like a slowing economy and supply-chain challenges may cap gains in the near term. Arm’s core smartphone business also faces maturation. But with a strong technology portfolio and role in key growth markets, Arm seems poised to deliver solid if not spectacular gains once valuations realign.
