Why Arm Holdings Stock Was Falling Today

Shares of Arm Holdings (NASDAQ: ARM) , the chipmaker best known for its low-power CPU architecture, were heading lower today, as it was caught up in the broader sell-off triggered by weak economic data last week, including rising unemployment and increasing fears of a recession. This morning, a rate hike by the Bank of Japan seemed to spark a wave of selling due to heavy borrowing in the yen to buy other assets, known as a carry trade .

While there wasn't any company-specific news out on Arm, the semiconductor sector has been highly volatile, and two of its key customers faced negative news over the weekend.

As of noon ET, the stock was down 3.2% after falling as much as 14.8% near the open.

Image source: Gettty Images.

The drawdown continues

After stocks plunged last Thursday and Friday on weakening economic data, the sell-off continued on Monday. Over the weekend, reports emerged that Nvidia , a close partner of Arm, would have to delay the launch of its new Blackwell platform due to a design flaw, and Berkshire Hathaway revealed that it sold half of its stake in Apple , another major customer of Arm.

Both news items likely pressured the broader tech sector, but the main reason for today's decline was macro-level concerns. While it's probably too early to talk about a recession hitting the U.S., that hasn't stopped fears of one from sweeping across the market, hitting high-priced artificial intelligence (AI) stocks like Arm, which trades at a price-to-sales ratio of 34 even after the recent sell-off.

Why Arm still looks like a long-term winner

Given its steep valuation, Arm could fall substantially further, but its business model gives it more resilience than the typical chip stock. Arm brings in revenue from licensing and royalties, and license revenue just surged in its recently reported fiscal first-quarter earnings report, up 72%.

That's a bullish indicator for future chip production, as it typically takes those licensees two to three years to begin selling those chips. Once they start selling them, Arm collects royalties on each sale, and royalties normally contribute more revenue than licenses.

Assuming that pattern holds, Arm should have significant royalty revenue coming down the pipeline in a few years. While the stock's valuation will likely continue to fluctuate, the business still looks solid.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Nvidia. The Motley Fool has a disclosure policy .