Why Arm Holdings Stock Lost 5% on Tuesday

Shares of Arm Holdings (NASDAQ: ARM) were heading lower on reports of disappointing early sales results from Apple's (NASDAQ: AAPL) iPhone 16, the new smartphone it just released that will include Apple Intelligence, its new artificial intelligence (AI) platform.

Arm makes roughly half of its royalty revenue from the iPhone, so it wasn't surprising to see the stock reacting poorly to the news.

Arm stock closed down 4.9%, while Apple lost 2.9%.

Image source: Getty Images.

iPhone 16 is off to a weak start

According to multiple analysts, sales of the new iPhone are down year over year after its first weeks on the market.

In a note this morning, Barclays said it's seeing signs of weaker demand for the new smartphone, including that Apple may have cut orders by 3 million units for a key Taiwanese chip component.

Another analyst, Ming-chi Kuo of TF International Securities, estimated that iPhone sales were down more than 12% in the first weekend of pre-sales, with an even sharper slide in sales of the iPhone Pro.

Arm stock has reacted in the past to news about Apple, as the two are close partners, so it's not a surprise to see the stock falling on this news. Arm licenses its CPU architecture for Apple to use in its iPhones, as its designs are known for being power-efficient.

Why investors shouldn't overreact to the news

Arm shares jumped when Apple said a few weeks ago that it was using Arm's v9 architecture, which carries a royalty rate that's approximately double that of the v8, the previous generation of Arm's CPU architecture.

While a decline in iPhone sales would be a headwind for Arm, Apple using the v9 should more than make up for it. Given that, Apple's challenges don't seem serious for Arm investors to change their approach to the chip stock.

Should you invest $1,000 in Arm Holdings right now?

Before you buy stock in Arm Holdings, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Arm Holdings wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $744,197!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.