Why Arm Holdings shares lost 5% on Tuesday

Actions of Arm holds (ARM -4.85%) headed lower on disappointing early sales results from Applehis (AAPL -2.91%) iPhone 16, the new smartphone it just launched that will include Apple Intelligence, its new artificial intelligence (AI) platform.

Arm earns about half of its revenue from iPhone royalties, so it was no surprise to see the stock react poorly to the news.

Arm shares fell 4.9%, while Apple lost 2.9%.

Image source: Getty Images.

The iPhone 16 got off to a slow start

According to several analysts, sales of the new iPhone declined year-on-year after the first few weeks on the market.

In a note this morning, Barclays said it saw 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 fell more than 12% in the first pre-sale weekend, with an even steeper drop in iPhone Pro sales.

Arm shares have reacted to Apple news in the past, as the two are close partners, so it’s no surprise to see the stock drop on this news. Arm licenses the CPU architecture for Apple to use in its iPhones because its designs are known for being energy efficient.

Why investors shouldn’t overreact to the news

Arm shares soared when Apple said a few weeks ago that it is using Arm v9 architecture, which has a royalty rate that is roughly double that of v8, the previous generation of Arm CPU architecture.

While a decline in iPhone sales would be a headwind for Arm, Apple using v9 should more than compensate. With that in mind, Apple’s challenges don’t seem serious enough for Arm investors to change their approach to the chip stock.