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Why Arm Holdings Stock Sank Today

Source The Motley Fool

Shares of Arm Holdings (NASDAQ: ARM) were under pressure on Wednesday. The chip design company's stock lost 7.5% as of market close and was down as much as 8.1% earlier in the day. The decline comes as the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) lost 1.1% and 2%, respectively.

The key semiconductor player is facing a global antitrust challenge from one of its most important customers.

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Qualcomm launches a multinational antitrust offensive

Qualcomm launched a global antitrust campaign against Arm Holdings, filing complaints with competition authorities on three continents. The mobile chip giant has submitted confidential filings to the European Commission, U.S. Federal Trade Commission, and Korea Fair Trade Commission, alleging Arm has anticompetitive practices.

Qualcomm alleges that Arm has moved from an open licensing model that it says fostered growth in the past to a restrictive approach that stifles competition. Arm makes its money by licensing its valuable IP to other chipmakers that produce their own chips. Qualcomm has been a major client of Arm's for many years.

Arm defended its practices, calling Qualcomm's allegations "a desperate attempt" to "detract from the merits and expand the parties' ongoing commercial dispute for its own competitive benefit." The recent shift in its business model is part of a larger strategy to accelerate growth and position it better in the uber-lucrative artificial intelligence (AI) market.

So is Arm Holdings a buy?

An ongoing regulatory battle could seriously hamper Arm's ability to grow at a pace that would justify its current valuation. I would wait for more clarity on these allegations before investing any further in Arm.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Qualcomm. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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