When Cathie Wood believes a particular growth stock is overvalued, that speaks volumes. Such is the case with Arm Holdings (NASDAQ:ARM) and its high-profile initial public offering (IPO). Arm and a handful of other chip stocks are down in a meaningful way today, as investors appear to be focusing in on valuations.
After surging to $69 per share the day after its IPO, ARM stock currently trades around the $51 level. With this marking the stock’s third daily decline, some investors may be rethinking whether the valuations of these chip stocks make sense. At the time of this writing, ARM stock is down roughly 3% for the day.
Other semiconductor rivals Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) are down 4% and 2.6% respectively in afternoon trading. This decline outpaces the broader Nasdaq Composite as well, with these two stocks contributing significantly to the index’s move.
Let’s dive into the rationale for the selling pressure in these names today.
Why Are Chip Stocks Down Today?
Investors are clearly paying greater attention to valuations than they have in the past. Indeed, the eye-watering valuations AMD and (especially) Nvidia have seen as a result of the artificial intelligence (AI) boom have made certain investors wary. At some point, every stock ought to be scrutinized on the basis of its fundamentals. And with Cathie Wood taking this view, other growth investors are clearly taking note.
Today’s market has also been spooked by commentary from the Federal Reserve in its Federal Open Market Committee (FOMC) meeting yesterday. With predictions of one more rate hike on the horizon and the potential for “higher for longer” interest rates, that’s not great news for high-growth companies. Valuations are a function of interest rates and, as such, these chip stocks stand to potentially lose more than their counterparts.
For now, I think these chip stocks remain on my watch list. Valuations do matter — and they’re starting to matter more to investors banking on “higher for longer” rates. So long as we’re in this environment, I believe more volatility is ahead for these chip names. Accordingly, investors ought to take appropriate precautions in their portfolios, depending on their allocations.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
