The Strange Reason for Arm’s Stock Drop: The Market May Be Punishing It Unfairly
Arm Holdings (ARM) stock dropped nearly 10% in one day, one of the sharpest falls in the chip space on Sept. 14. The reason was the same AI selloff that hit the whole sector. The selloff started with an essay from Anthropic CEO Dario Amodei arguing that AI development should slow down. Amodei argued the technology is advancing quicker than humans’ ability to control it. The weight of this statement increased further when SpaceX (SPCX) CEO Elon Musk and OpenAI CEO Sam Altman agreed soon after. Investors read that as a threat to AI spending and sold off stocks tied to the theme. Arm was treated as a prime AI name and punished accordingly.
The problem with that reaction is that Arm isn’t really an AI company yet — at least not in terms of where its money comes from. Arm licenses its chip designs and earns a royalty on nearly every chip that ships using them. A large share of that still comes from smartphones. Mobile processors are Arm’s single-biggest source of royalties, coming in at about 43% in fiscal 2026. No other market comes close. The company’s own AI chip, the AGI CPU, is still early in its commercialization and won’t become a meaningful revenue contributor until fiscal 2028.
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This is what the recent selloff ignored. When Arm trimmed its royalty outlook in July, the reason had nothing to do with AI. CFO Jason Child pointed to weak smartphone demand caused by higher memory prices. So, the real pressure on Arm right now is coming from phones, not from any AI slowdown. The market sold ARM stock on a fear that barely touches how the company actually earns today.
About Arm Holdings
Arm Holdings develops and licenses the technology that powers many of the world’s computer chips. The company provides a product portfolio, including CPU, IP, GPU, and neural processing unit accelerators. Arm serves semiconductor companies, original equipment manufacturers (OEMs), cloud service providers, and organizations developing chips. Its designs are used in processors for smartphones, PCs, data centers, networking equipment, automotive, and robotics. Founded in 1990, the company is headquartered in Cambridge, United Kingdom.
Although ARM stock has performed well over the past year, it has slightly lagged the broader semiconductor sector. The stock has returned about 59% in the past 52 weeks, while the iShares Semiconductor ETF (SOXX) has returned about 94% during the same period. However, Arm’s momentum has accelerated sharply this year. ARM stock has surged 123% year-to-date (YTD), significantly outperforming SOXX’s return of about 67% over the same period.
Arm’s valuation is difficult to judge against its own history, since the company only went public in late 2023. The forward price-to-earnings (P/E) ratio of 207.4 times and price-to-sales (P/S ) ratio of 51.8 times do not have five-year averages to compare against. What we can see is that these numbers are steep, however, even though ARM stock has been cut nearly in half since its 52-week high in June.
The EPS outlook partly explains the high multiples. Analysts expect earnings growth of 34% in fiscal 2027 and 65% in fiscal 2028, marking solid acceleration for a company of this size. The balance sheet is a genuine strength as well. Arm holds $3.89 billion in cash against just $485 million in debt, making it essentially debt-free.
So, the company is strong as per most aspects, but a valuation this high leaves little room for error. Any stumble in the AI story or the smartphone business could hit ARM stock hard, as this week has shown
Arm Reports 22% YOY Revenue Growth
Arm Holdings posted its first-quarter fiscal 2027 results on July 29. Revenue came in at $1.29 billion, marking a 22% year-over-year (YOY) increase. The company also reported non-GAAP earnings of $0.45 per share, exceeding market expectations and rising 29% YOY. Royalty revenue grew 22% YOY to $715 million.
The growth was driven by stronger adoption of Arm’s technology, greater use of Arm-based chips in data centers, and higher royalty rates from products such as Arm CSS and Armv9 architecture. Additionally, annualized contract value (ACV) rose 13% YOY to $1.732 billion.
Going forward, management guided Q2 fiscal 2027 revenue to be around $1.38 billion, plus or minus $50 million.
What Are Analysts Saying About ARM Stock?
Following the Q1 earnings report, Morgan Stanley raised its price target on ARM stock from $202 to $212 while maintaining an “Equal-Weight” rating. In contrast, Wells Fargo and HSBC cut their price targets from $350 to $280 and $315 to $230, respectively. Meanwhile, New Street has a “Buy” rating for Arm Holdings stock with a $260 price target.
ARM stock currently has a consensus “Moderate Buy” rating from 32 Wall Street analysts with coverage. The mean price target of $290.59 suggests potential upside of 19% from current levels, while the highest price target of $480 reflects a possible gain of 97% from here.
On the date of publication, Jabran Kundi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com