Why Arm Stock Is Sinking today

Shares of Arm (NASDAQ: ARM) lost ground in Wednesday morning trading. The semiconductor company's stock price was down by 6.1% as of 12:55 p.m. ET.

Bloomberg published a report Tuesday night stating that Arm had informed Qualcomm that it plans to cancel its chip design architecture licensing arrangement. If that does happen, it could result in significant sales and earnings declines for both chip companies. Qualcomm stock was down 3.4% as of this writing.

Arm and Qualcomm are locked in a complicated licensing dispute

Qualcomm uses the design architectures that it licenses from Arm in its central processing units (CPUs) for mobile devices and computers, but the companies' relationship has been jeopardized by legal and contractual disputes. Arm has now reportedly issued a required 60-day notice indicating that it plans to cancel Qualcomm's licensing rights. If that license were to be canceled, Qualcomm could be prevented from selling new products based on Arm's architectures.

The dispute between the two companies appears to be connected to civil litigation that's set to go to trial in December. Arm has filed a breach-of-contract suit against Qualcomm over the latter company's acquisition of chip designer Nuvia in 2021. Arm's suit alleges that Qualcomm did not complete the required contract renegotiations after acquiring Nuvia -- a company that licensed Arm's architecture. Nuvia's designs have been used in Qualcomm's chips for artificial intelligence (AI) PCs and are slated to be incorporated into its new Snapdragon mobile processors, but Arm is arguing that designs using its architecture could not be transferred to Qualcomm as part of the acquisition. In turn, Qualcomm filed a countersuit -- and the disputes are intensifying as the trial date nears.

What comes next for these chip giants?

Arm's core business is licensing its designs, and Qualcomm is a key customer. Some estimates suggest that if it cancels its license with Arm, Qualcomm could lose roughly $39 billion in annual sales. Ending their deal would lead to a major sales decline for Arm as well.

On the other hand, these issues may be resolved before it comes to that. Analysts covering the chip industry for JPMorgan Chase expect that the magnitude of potential lost revenues for both companies will drive the two sides to come to an agreement. Meanwhile, analysts for Bloomberg Intelligence said they expected the licensing deals will be renegotiated, and that Qualcomm will end up paying higher licensing rates on chips from Nuvia that use Arm's architecture.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Qualcomm. The Motley Fool has a disclosure policy.