Shares of Arm Holdings (NASDAQ: ARM) were taking it on the chin today after a disappointing earnings report from ASML Holdings (NASDAQ: ASML) led to a broad-based sell-off in artificial intelligence (AI) stocks. Arm was the worst performer of the group as its shares finished the day down 12%, which was even worse than ASML’s 7.1% drop.

Arm shares get spooked

Artificial intelligence stocks have soared in recent months, and Arm has been among the winners. The chip designer, known for highly efficient CPU architecture, has seen revenue growth accelerate from the breakout technology.

However, ASML’s update this morning threw cold water on the sector and led to a broad sell-off in AI stocks. As one of the most expensive in the sector, Arm got hit hard on the news.

A pair of tweezers holding a chip.

Image source: Getty Images.

ASML reported a sharp decline in revenue, and its guidance called for a continued decline in sales in the second quarter. While that news was roughly what Wall Street expected, both the first-quarter and revenue number and the guidance missed analyst estimates.

ASML expects revenue growth to improve in the second half of the year and accelerate in 2025, but the update shows that demand from chip manufacturers like TSMC may not be as strong as expected. That, in turn, could be a warning sign for Arm as the stock soared in February after it promised accelerating revenue growth due to AI-related demand.

What’s next for Arm

High expectations are built into Arm stock, which is trading at a forward price-to-earnings (P/E) ratio above 100 and isn’t putting up the kind of eye-popping revenue growth as its collaborator Nvidia. Still, the company figures to have a bright future in AI as its CPU architecture is favored by companies like Nvidia, in part because it requires less power than alternatives.

We’ll get an update from Arm next month when its fiscal fourth-quarter earnings report comes out. Until then, expect continued volatility from the stock as investors weigh its valuation with the future growth in AI.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Why Arm Holdings Stock Took a Dive Today was originally published by The Motley Fool

Source: finance.yahoo.com