4 reasons why the Arm Holdings stock price is in a bear market

Arm Holdings (NASDAQ: ARM) stock price continued its deep sell-off as the sea of red in the semiconductor industry spread. It crashed by over 12% on Wednesday and landed to its lowest swing since February 9th of this year. Most importantly, it has crashed by over 34% from its highest point this year.

ARM stock chart by TradingView

The SOXX ETF has corrected

Arm Holdings is not the only semiconductor stock in a deep sell-off as all ETFs that track the industry have dived. The popular iShares Semiconductor ETF (SOXX) has plunged by over 12% from its highest point this year.

Other popular chip names like AMD, Nvidia, Intel, and Broadcom have all retreated after leading a rally in the equities market this year.

There are three main reasons why Arm Holdings is in a strong dive. First, the retreat is because of profit-taking as the artificial intelligence fatigue sets in. Indeed, most AI stocks like C3.ai, SoundHound AI, and AITX have all fallen deeper than these semiconductor industries.

It is not uncommon for trending sectors to move into a correction. Recently, we have seen highly popular sectors like the electric vehicle (EV), cannabis, and solar energy decline sharply.

Second, investors are simply waiting for the first quarter earnings to gauge the performance of Arm and other semiconductor companies. Taiwan Semiconductor was the first company semiconductor company to publish its earnings on Wednesday. It will be followed by Super Micro Computer. 

Since TSMC stocks were great, if Super Micro publishes strong results, we could see other names bounce back. Arm will release its results on May 8th.

Arm Holdings is highly valued

Finally, the Arm Holdings stock price has retreated because of its valuation metrics. Arm has a market cap of over $110 billion, making it a highly overvalued company since its annual revenue stands at less than $3 billion.

In the most recent report, the company estimated that its revenue for the current financial year will be between $3.1 billion and $3.2 billion. As such, it has a price-forward sales of 34.5x, which is excessive considering that its revenue is growing at less than 15%.

The other reason why Arm Holdings share price has crashed is the Federal Reserve, which is poised to maintain a hawkish tone now that US inflation has been higher than expected. The headline CPI rose to 3.5% in March while the core figure rose to 3.8%.

Highly valued companies tend to do well when there are animal spirits in the financial market. These spirits happen when the Fed is moving from a hawkish into a dovish tone.

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