Arm Holdings plc (NASDAQ: ARM) Shows Volatility and Long-Term Potential, 4 weeks ago Technical Analysis

The stock of Arm Holdings plc (NASDAQ: ARM) displayed notable volatility on June 20, 2024, closing at $160.77, representing a decline of 7.67%. The stock's intraday range hovered between $156 and $173.85, and the year high stands at $177.31, whereas the year low is $46.50. The relative strength index (RSI14) is at an elevated 78, signaling an overbought condition. The average true range (ATR) is 5.97, indicative of the stock's significant recent volatility. Key moving averages reinforce the stock's recent bullish trend, with a 50-day moving average of $119.05 and a 200-day moving average of $91.24.

Despite the bearish closing, the stock has substantial support at $157.89 and resistance at $174.13. Given these technical indicators, one can infer a potential pullback towards the support level or a consolidation phase before any further upward movement. The MACD over the past three months is positive at 12.28, supporting the bullish momentum. However, the sharp decline coupled with high RSI suggests potential short-term downside risk.

Fundamental Analysis

Arm Holdings' market capitalization is a robust $168.46 billion, marking it as a significant player in the semiconductor industry. The earnings per share (EPS) is relatively low at $0.30, resulting in a steep price-to-earnings (P/E) ratio of 535.90. This high P/E ratio might indicate an overvaluation, particularly when compared to sector averages. The trading volume of 22.08 million surpassed the average volume of 10.14 million, reflecting heightened investor interest and activity possibly driven by recent AI-related news.

The company's discounted cash flow (DCF) model estimates an intrinsic value for ARM at $234.14, suggesting that the stock is currently undervalued based on projected future cash flows. This undervaluation could potentially offer a significant margin of safety for long-term investors.

Market Sentiment and News Impact

Arm Holdings plc Recent commentary and analyst updates have significantly influenced ARM's stock performance. Positive sentiment stemming from the company's AI potential and strategic positioning in the Edge AI market has propelled the stock, as evidenced by a price target uplift to $180. Despite concerns about the rapid ascent, the overall analyst sentiment leans towards a favorable outlook, with the consensus being a 'Buy' and no strong sell ratings.

Short-term Predictions

For the next trading day, June 21, 2024, ARM may experience continued volatility. The RSI and recent price correction indicate potential further short-term downside, possibly testing the support level at $157.89. However, given strong market interest and high trading volume, any positive market sentiment or news could see the stock rebounding swiftly.

Over the upcoming week, ARM is likely to stabilize. It may oscillate between the specified support and resistance levels while investors digest recent rapid price changes and await new developments or earnings announcements.

Long-term Investment Potential

Arm Holdings possesses solid long-term growth potential, underpinned by its strategic focus on AI and semiconductor innovation. The DCF suggests that the intrinsic value significantly exceeds the current price, providing a compelling case for long-term appreciation. However, the high P/E ratio poses risks, emphasizing the need for sustained earnings growth to justify the valuation.

Overall Evaluation: Hold

Arm Holdings, despite its recent decline, exhibits strong fundamentals and future growth prospects within the AI and semiconductor sectors. Given the elevated RSI and high P/E ratio, it is prudent to categorize ARM as a 'Hold'. This classification balances the stock's potential for continued appreciation against the risks of current overvaluation and short-term volatility. Investors should monitor market conditions and company developments closely to reassess positioning as new information becomes available.

Check full Arm Holdings plc forecast and analysis here.