Arm Holdings (NASDAQ: ARM) stock price has moved into a deep bear market in the past two months as the artificial intelligence (AI) fatigue continued. It has plunged by over 34% from its highest point this year. Other semiconductor companies like Super Micro Computer (SMCI) and Nvidia have also dipped.

Arm Holdings, the giant player in the semiconductor company, has been in the spotlight in the past few months as questions about its valuation remains. The firm has a market cap of over $109 billion and had revenues of over $2.9 billion in the trailing twelve months (TTM) and a net profit of $85 million.

Arm Holdings is seeing moderate growth as the global semiconductor business recovers. As a result, the company boosted its revenue guidance after beating its estimates in the last financial results.

Arm Holdings estimates that its Q4 revenue will be between $850 million and $900 million. For the year, the company estimates that its revenue will be between $3.1 billion and $3.25 billion. The average of this estimate is $3.175 billion and is about 19% higher than what it made in the last financial year.

These numbers mean that Arm Holdings is quite overvalued since it has a forward price-to-sales ratio of 34. In contrast, Nvidia has a forward P/S ratio of 19.50 and AMD has a figure of 9.52. Remember that Nvidia wanted to buy Arm in a $40 billion deal in 2020, meaning that its valuation has soared by over $60 billion.

Still, analysts believe that Arm Holdings can justify its pricey valuation because of its unique business model. Arm does not build its semiconductors. Instead, it makes money through selling its licenses and royalties for its technology.

Arm Holdings is also expected to benefit from most emerging technologies that are powered with its architecture. Over the years, it has expanded its market from general CPU to industries like automotive, Internet of Things (IoT), cloud and networking, and consumer electronics.

The company is also benefiting from trends like artificial intelligence that require more computing power. Some of its top appliances are Google Nest, Cruise, and Nvidia’s Generative AI. 

Arm is also more popular than its closest competitors like X-86 and RISK-V because of its energy efficiency and the ability to license. It also has over 15 million software developers using its technology, giving a big moat. It had a market share of 51% in 2023, an increase from 42% in 2020.

Arm Holdings faces two key challenges ahead of its earnings. First, most semiconductor companies that have published their stocks have tumbled. Intel is down by over 18% in the past 30 days while AMD and Super Micro Computer crashed after their results. 

Second, the company may struggle to mirror its first post-earnings pop in February when it surged by over 40% in a single day.

ARM chart by TradingView

Turning to the daily chart, we see that the Arm stock price has tumbled hard in the past few weeks. It has remained below the 50-day moving average for 12 straight days. A closer look also shows that it has formed a rising wedge pattern, which is a popular bearish sign. It has also formed a bearish flag pattern.

Therefore, while it is always difficult to predict how a stock will behave after earnings, I suspect that it will dive. If this happens, it will likely drop to $85.73, its lowest level in April. That price is about 20% below the current level.

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