- Arm Holdings is in a downtrend after four-session sell-off.
- Thursday might be its fifth consecutive down session with ARM down more than 1%.
- Broader market is regaining traction with S&P 500 surfing higher.
- Philly Fed report shows US manufacturing expanding at fast clip.
Arm Holdings (ARM) stock opened lower on Thursday, aiming for its fifth consecutive losing session.
ARM stock lost 12% on Wednesday as the S&P 500 posted its fourth straight down session. On Thursday, however, the S&P 500 is showing signs of a turnaround in market sentiment, and the S&P 500 rose 0.6% in the first 90 minutes of the regular session.
Taiwan Semiconductor (TSM) traded 4% lower on Thursday despite posting Q1 results that beat consensus and raising guidance.
Arm stock news: Hawkish Fed doesn’t mix well with Arm’s lofty valuation
The market has grown seriously pessimistic in the past week over evolving expectations that the Federal Reserve (Fed) will only cut rates once or twice this year rather than an earlier pledge for three cuts.
This is because recent strong economic data, melded with sticky inflation reports, makes any interest rate cut unnecessary. Inflation has stalled above 3%, while the Fed wants it to continue on a path toward 2% core inflation.
The Fed’s Beige Book on Wednesday showed that the US economy continues to expand at a fast enough clip to stall disinflation. On Thursday, the Philadelphia Fed Manufacturing Survey arrived at an astounding 15.5 reading, following March’s 3.2.
Higher interest rates hurt growth stocks like Arm Holdings, which trades at a steep valuation of about 100 times forward earnings. That lofty valuation is a product of Arm’s new technology — the V9 architecture that is expected to double royalty payments compared with its predecessor technology.
Additionally, officials believe that since the industry is adopting more cores per chip to deal with heavier artificial intelligence (AI) workloads, Arm’s royalty payments should increase. Semiconductor designers like Nvidia (NVDA) and Advanced Micro Devices (AMD), as well as mobile phone makers like Apple (AAPL) and Samsung, pay Arm licensing fees to adopt their design architecture.
Arm processors account for about 99% of the smartphone market since their intellectual property is ubiquitous throughout the mobile supply chain.
Chinese policy could reduce Arm automotive sales
News broke earlier this week that the Chinese government is cracking down on Chinese electric vehicle (EV) companies that purchase most of their semiconductors from foreign companies. Originally, the policy was to push domestic automakers to utilize at least one fifth of Chinese-made chips by 2025. However, due to US sanctions on Chinese companies surrounding leading AI chips, officials are now pushing automakers to quicken the pace.
Chinese automakers could purchase more foreign chip designs if they were produced by local foundries like Semiconductor Manufacturing International or Hua Hong Semiconductor.
Arm has recently unveiled a slew of new products for AI-connected vehicles that it plans to roll out in the next few years. These include Arm Automotive Enhanced processors for autonomous cars, as well as Arm Compute Subsystems, which is supposed to reduce development time and costs. However, it is beginning to look like the world’s largest automotive market may be off limits to Arm.
Evercore upgrades Arm’s price target
On Tuesday, investment bank Evercore slapped an impressive $156 price tag on ARM stock, writing that the England-based firm is at the center of three market shifts. These are AI-enabled smartphones, AI-focused server CPUs and the Internet of Things.
In regard to the server market, Arm’s “share has increased from near 0% in 2018 to approximately 5% in 2023," wrote analyst Mark Lipacis. "Moving forward, we would expect Arm to reach 40-50% [of the] server CPU market share over the next 10 years."
Semiconductor stocks FAQs
A semiconductor is a term for various types of computer chips. Officially called semiconductor devices, these computer chips rely on semiconductor materials like silicon and gallium arsenide to process the electrical current that produces the modern world of computing. They come in many shapes, sizes, enhancements and configurations such as diodes, transistors and integrated circuits to more complicated applications like DRAM memory, simple processors and even GPUs.
First, there are the pure chip designers, such as Nvidia, AMD, Broadcom and Qualcomm. These companies use sophisticated software to design and test chips. Second, there are the equipment manufacturers that provide the machines necessary to build computer chips. These include ASML and Lam Research. Then, there are foundries that manufacture the chips. These include Taiwan Semiconductor and GlobalFoundries. Last of all are the integrated device manufacturers who design their own chips and additionally manufacture themselves. These include Samsung and Intel.
It is the observation that the number of transistors in an integrated circuit doubles every two years. The “law” is named after Gordon Moore, who founded Fairchild Semiconductor and later Intel. The doubling is possible due to the shrinking size of process nodes or parts in the computer chip. In 1971 the advanced commercial manufacturing had reached 10 microns in width. In 1987 semiconductor technology had advanced to 800 nanometers in width. By 1999, this process had moved to 180 nanometers. By 2007, the size had dropped to 32 nanometers, and this fell all the way to 3 nanometers in 2022, which is close to the size of human DNA.
In 2022, the global semiconductor industry had revenues just under $600 billion. In total, the industry shipped 1.15 trillion semiconductor units in 2021. The leading nations involved in the semiconductor supply chain are Taiwan, the United States, China, the Netherlands, South Korea, Japan and Israel.
Arm stock forecast
On Wednesday, ARM stock slumped 12%, falling below an important support range that had held up the stock for the past three months.
The $118 to $121.50 range came in handy on a number of occasions in February, March and April of this year. The seismic break tells traders to expect further downside.
Since ARM stock has only been trading since mid-September of last year, or about seven months, the only real support in sight is the February 8 low from when ARM gapped up on its quarterly revenue beat. That low was at $94 and should work again, unless further worries over its valuation send ARM back to its January high near $80.
ARM daily stock chart
With the Relative Strength Index (RSI) now at 33, some bullish traders will surely be looking for entry on this high flyer soon. But a sell-off this severe usually lasts more than a week. The best bet is to wait until the RSI falls below 30 and only enter the position once the RSI exits back above 30.
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