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Arm Holdings shares fell 7% in premarket trading Monday as a broad risk-off move hit technology and semiconductor stocks.
A sharp drop in the Nasdaq Composite added pressure to high-multiple companies in the chip design space.
The sell-off came as AI-linked stocks fell after leaders of major AI companies warned about risks associated with rapid AI development.
The move added to existing pressure on Arm shares, which have remained well below their all-time high of $452.70 reached earlier this year.
Arm’s valuation has been a key concern for investors.
An HSBC analyst downgraded the stock to Hold in July, citing foundry capacity constraints at advanced process nodes and a valuation that had priced in several years of future growth.
Arm shares were trading at 110 times forward earnings according to Stockanalysis.com.
Regulatory and AI concerns add to pressure
Arm is also facing scrutiny from the US Federal Trade Commission over its chip licensing practices, adding another source of uncertainty for investors.
Concerns surrounding majority owner SoftBank’s leveraged AI investment strategy have also weighed on sentiment toward Arm.
Investors are assessing whether a potential slowdown in AI development could expose risks in SoftBank’s strategy and reduce the perceived upside for Arm.
Despite the near-term pressure, Arm’s licensing and royalty model remains a key strength.
The business generates strong margins and robust cash flow, providing the company with financial resources to continue investing in chip designs and AI-related technologies even as market conditions become more challenging.
The increasing adoption of Arm-based CPUs in data centres and AI infrastructure could also help the company diversify beyond smartphones and develop more stable recurring revenue streams.
However, several risks could limit Arm’s performance in the near term.
Weakness in the global smartphone market could pressure royalty income, while supply bottlenecks for advanced chips could slow the rollout of its AGI CPUs.
New AI-focused products also initially carry thinner margins than Arm’s traditional business, potentially limiting profitability until the platform matures and scales.
Piper Sandler sees server CPU opportunity
The latest positive catalyst for Arm came on Sept. 9, when Piper Sandler initiated coverage with an Overweight rating, citing momentum from server CPU design wins.
However, the positive call has so far failed to provide lasting support for the shares.
Piper Sandler said Arm has a dominant position in CPU intellectual property, with a 50% market share of its target markets.
The firm expects Arm’s IP revenue to grow at approximately a 20% compound annual growth rate to around $12 billion by fiscal 2031.
The investment bank also highlighted Arm’s expansion into accelerator intellectual property as a potential source of upside.
Piper Sandler estimated that capturing approximately 10% of the ASIC market could double Arm’s current earnings.
The firm valued Arm using a fiscal 2031 sum-of-the-parts enterprise-value-to-EBIT approach, while acknowledging that the stock trades at an expensive valuation.
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