Shares of Arm Holdings (ARM 2.28%) fell 19.4% in December, according to data from S&P Global Market Intelligence.
Arm didn't report any financial news during the month, but its high valuation came under scrutiny following an analyst downgrade and the potential for selling pressure from its largest shareholder, Softbank (SFTB.Y 5.44%).
NASDAQ: ARM
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Goldman Sachs gives the thumbs down as investors fret over Softbank's ownership
It was actually a relatively light news month for Arm, but a skeptical investing public tended to take profits in December after a strong run to the year for semiconductors.
On December 15, sell-side analyst Jim Schneider of Goldman Sachs downgraded Arm shares to the ignominious "Sell" rating, from his prior "Neutral" rating. "Sell" ratings are fairly rare among Wall Street analysts, with "Neutral" usually indicating skepticism and "Sell" indicating outright pessimism.
Schneider flagged Arm along with a handful of other semiconductor stocks that had been disappointments in the early stages of the AI buildout, claiming Arm had "limited ability" to leverage the AI cycle. He also pointed out risks to Arm's "business model transition" as it moves from licensing IP blocks to full sub-systems, and even explores making its own chips, potentially putting it competition with its customers.
In truth, the downgrade doesn't seem that reasonable, since Arm licenses its architecture to Nvidia (NVDA 2.09%) for its Grace CPUs, as well as most of the cloud giants for their in-house server CPU designs. Last quarter's revenue grew 34%, so it doesn't appear that growth is a big problem right now.
Rather, the problem may be Arm's sky-high valuation, even in light of that growth. Shares trade at 66 times 2026 earnings estimates and over 50 times 2027 earnings estimates.
The high valuation is likely partly due to Arm's small float, with major shareholder Softbank owning an estimated 87% of the company.
However, that high ownership by Softbank also became a risk in December. That's because Softbank had a $22.5 billion funding commitment to OpenAI due at the end of the year. In order to fund its OpenAI investment, it was reported that Softbank took out an $8.5 billion margin loan on its Arm stock, with the capacity to tap another $11.5 billion.
While Softbank's Arm stake is worth about $105 billion today, giving Softbank lots of room for a stock decline before its margin loan would be called, having the largest shareholder put leverage on any stock will dramatically increase the risk of an exaggerated sell-off, should anything happen to the economy or Arm's business specifically.
Image source: Getty Images.
Arm's business should do well, but its stock may remain in limbo
Arm has long been dominant in low-power applications such as smartphones, and has found favor as the CPU architecture of choice for many cloud computing giants and AI servers. However, the x86 architecture is now getting more power efficient, giving Arm a competitive run for its money in the low-power server CPU space.
Still, the demand for computing is so high that Arm is likely to do well in the AI era, even amid increased competition. The question is whether its high valuation reflects a lot of these positives already, and also what Softbank may do with its large ownership stake.
