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Why Arm Holdings Stock Plunged Today

In Business
April 20, 2024

Shares of Arm Holdings (NASDAQ: ARM) were taking a dive today, getting hit for the third day in a row on disappointing news on the artificial intelligence (AI) front.

After ASML and Taiwan Semiconductor Manufacturing both fell on their earnings reports on Wednesday and Thursday, dragging down Arm and other AI stocks, today Super Micro Computer (NASDAQ: SMCI) shares plunged after one analyst observed that the company failed to pre-report revenue, which had become a pattern for it in earlier reports.

As of 3:18 p.m. ET, shares of Arm were down 14.5%.

A red stock chart with an arrow going down.

Image source: Getty Images.

Is the AI bubble bursting?

The AI bubble may not be bursting, but it is clearly deflating, as stocks like Super Micro Computer and Arm are now down sharply from their peaks earlier this year, even though there hasn’t been a clear indication that momentum in the AI sector is slowing.

ASML, the leading semiconductor manufacturing stock, is in the middle of a transition to new technologies; TSMC reported strong growth in high-performance computing, a proxy for AI, but cited weakness in the smartphone market, and it’s unclear if the lack of a preliminary report at Supermicro, as that company is also known, is meaningful.

However, altogether the news shows that AI momentum isn’t enough to take over the semiconductor sector, as these stocks are still sensitive to broader tech trends, including weak demand for consumer devices like smartphones and PCs.

What it means for Arm

Arm stock is now down nearly 50% from its peak in February, as the stock was trading at a sky-high price-to-sales ratio, which was roughly 50 at one point. In addition, its float is relatively low, which increases volatility, as around 90% of the stock is held by Softbank.

However, price-to-sales may not be the best way to judge Arm stock, as it is highly profitable. On a forward P/E basis, it’s expensive at around 75 right now, but the company has a number of competitive advantages that led to its surge earlier this year, and its revenue growth is accelerating on AI-related demand.

There’s no doubt this has been a frustrating week for Arm shareholders, and the AI sector more broadly, but there’s no material reason to sell based on the pullback. We’ll learn more once earnings reports start rolling in.

Keep an eye on Supermicro’s upcoming update, which is scheduled for April 30, and Arm’s should come out sometime in May.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Why Arm Holdings Stock Plunged Today was originally published by The Motley Fool

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