Why Arm Holdings Stock Was Tumbling Today
Key Points
Agentic AI is starting to drive a boom in CPUs
Arm is designing its own chip for the first time.
The valuation is expensive, but the valuation has a lot of growth potential.
- 10 stocks we like better than Arm Holdings ›
Shares of Arm Holdings (NASDAQ: ARM) were pulling back one session after surging in sympathy with a strong earnings report from Intel.
CPU stocks, including Arm, have been soaring in recent weeks as it becomes clear that Agentic AI is driving outsize demand for CPUs. There was no company-specific news out on Arm today, but the stock seemed down on profit-taking, and as investors seemed to think the rally had gotten overheated following Friday's surge.
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As of 10:49 a.m. ET, Arm stock was down 8.9%, following a jump of 14.8% on Friday.
Image source: Getty Images.
Is Arm overbought?
Even with today's drop, Arm is still up more than 50% from its low point on April 7, less than three weeks ago.
The stock surged on March 25 when it announced that it was making its own chip for the first time, a departure from its historical licensing model. However, it quickly gave back those gains in the broader market malaise around the war in Iran.
After rallying over the last three weeks on cooling tensions in Iran and a general surge in AI stocks, Arm jumped on Intel's earnings report as the legacy chipmaker easily beat expectations in its first-quarter earnings report and gave better-than-expected guidance. Intel is a direct competitor with Arm in the CPU market, though Arm's power-efficient architecture is considered an advantage in segments like smartphones.
Intel CEO Lip-Bu Tan specifically called out the increasing need for CPUs as models shift to agentic functions, which bodes well for peers like Arm. AMD, another top CPU maker, also pulled back today after jumping on Friday.
What's next for Arm?
As the stock has soared, Arm's valuation has gotten stretched, and it now trades at a price-to-earnings ratio of 130 based on adjusted earnings per share.
The company's plan to launch its own silicon should change its growth trajectory, and the company is calling for $25 billion in annual revenue by 2031, though favorable supply/demand dynamics could push that higher.
We'll learn about Arm's prospects when it reports earnings next Wednesday, but the tailwinds in the CPU market are certainly good news, despite today's pullback.
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Jeremy Bowman has positions in Advanced Micro Devices and Arm Holdings. The Motley Fool has positions in and recommends Advanced Micro Devices and Intel. The Motley Fool has a disclosure policy.
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