Why Arm Holdings Stock Lost 34% in July

Shares of Arm Holdings (NASDAQ: ARM) were pulling back last month on broader concerns about the AI boom, and as the stock may have gotten overheated in the second quarter.

Chip stocks fell broadly last month as investors questioned the durability of the AI boom, including whether hyperscalers would earn a return on investment for the massive capital expenditures they are pouring into AI infrastructure.

According to data from S&P Global Market Intelligence, the stock finished the month down 34%. As you can see from the chart below, Arm fell in tandem with the VanEck Semiconductor ETF, though it experienced an outsize decline due to its high valuation.

ARM data by YCharts

What happened with Arm

There was relatively little company-specific news out on Arm last month, with the exception of its earnings report at the end of the month, which actually sent the stock higher.

Several Wall Street analysts adjusted their price targets and ratings on the stock over the course of the month. HSBC lowered its rating from buy to hold with a price target of $315, primarily on valuation concerns. The firm noted that the surge in the stock that followed the "Arm Everywhere" event in March, when it launched its new AGI CPU, meant its long-term growth is already priced in.

Other comments also noted that capacity constraints could hold back the company's growth over the coming quarters, as well as weakness in the smartphone market, pressuring its growth.

In its fiscal first-quarter earnings report, the company edged out estimates on the top and bottom lines with solid growth in both royalties and licensing revenue. Data center royalty revenue more than doubled once again, and that segment is on its way to becoming Arm's biggest, topping smartphones.

Second-quarter guidance was also better-than-expected, and the stock bounced the next day with the help of the rally in the AI sector after Ken Griffin's Citadel bought a portfolio of AI stocks valued at more than $10 billion from Situational Awareness, which was facing a margin call.

Image source: The Motley Fool.

What's next for Arm

Arm is set to begin shipping the new AGI CPU in the fiscal fourth quarter, which ends in March. That will be a big test for the company, and the stock could jump if the rollout goes well. Demand is already outstripping supply, and the company guided to $15 billion in CPU revenue and $25 billion in overall revenue in fiscal 2031. It also forecast adjusted earnings per share of $9 that year.

How Arm performs relative to that forecast will determine how the stock does over the coming years. The next few quarters should offer some key clues where it's headed.

HSBC Holdings is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Arm Holdings and VanEck ETF Trust-VanEck Semiconductor ETF. The Motley Fool has positions in and recommends Arm Holdings. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.