Arm Holdings, the British chip design company whose technology powers most of the world’s smartphones and many other devices, saw its stock price tumble 12% on Wednesday. This sharp decline shattered a key technical support level and represented a dramatic reversal of fortune for a company that had seen its shares soar over 150% just months ago on hopes it would be a major player in artificial intelligence chips.
The punishing sell-off in Arm’s stock came as investors grew increasingly concerned that the company is failing to capitalize on the generative AI boom that has fueled explosive growth at rivals like Nvidia. While Arm’s energy-efficient chip designs have long been the go-to choice for mobile devices, the heavy computational demands of AI systems like ChatGPT appear to be favoring more powerful chip architectures.
“Arm’s struggles highlight just how swiftly the AI landscape is shifting,” said Wayne Lam, an analyst at CCS Insight. “For decades, Arm was the indisputable leader in developing chips that sacrificed some performance for incredible power efficiency. But that trade-off is no longer tenable when AI workloads require massive numbers of calculations to be carried out in real-time.”
Arm went public last September in a highly anticipated $54.5 billion IPO, with the company’s majority owner SoftBank retaining 90% ownership. The stock initially surged nearly 25% above its $51 per share offering price. However, after peaking in February, Arm has given up all of those gains and more amid growing concerns about competition.
While Arm has begun rolling out chips optimized for AI applications, analysts say it is playing catch-up to Nvidia, AMD and a host of AI startups working on specialized circuitry designed from the ground up for tasks like language modeling and image generation. The competitive threat was highlighted in November when Google selected its own internally developed “Tensor” chips over Arm’s designs to power its Bard chatbot.
For Arm, the stakes could hardly be higher. Over 200 billion Arm-based chips have been shipped worldwide to date, but the company earns only a small royalty on each one. To maintain its growth trajectory, Arm desperately needs to extend its dominance into the exponentially more lucrative market for AI processors that can sell for thousands of dollars each.
“Arm has been a cultural phenomenon, but innovation is making the tech world increasingly cutthroat,” said Lila Franklin, a senior semiconductor analyst at Ovum. “If they can’t gain traction in AI, Arm risks being relegated to a niche player in a market it once ruled.”
The company pushed back against such dire predictions in its most recent earnings report. Arm’s CEO Rene Haas touted “strong royalty growth” and declared that “the AI wave drove licensing growth as these new devices require Arm’s performant and power-efficient compute platform.”
However, Haas’ optimism did little to slow this week’s stampede of investors fleeing Arm’s stock. The sell-off sent shares plunging below their 50-day and 10-week moving averages, which had previously acted as technical support levels. Arm now trades more than 25% below its January peak.
Not all analysts have given up on the chipmaker though. At investment bank Cowen, semiconductor analyst Matthew Ramsay kept his Outperform rating on the stock following the rout. In a note to clients, Ramsay argued that Arm’s early momentum in AI chips for mobile and automotive applications could help it get a foot in the door of the data center market as well.
Still, with Nvidia and others holding a head start, Arm likely faces an uphill climb to replicate its prior dominance. The race is on for who will become the Intel of generative AI. For a company that once pulled ahead of the pack by making low-power chips for power-constrained devices, competing in the bare-knuckle world of AI may prove to be Arm’s biggest challenge yet.
