Arm Stumbles as Bernstein Undermines Its AI Potential


Shares of Nas newbie Arm Holdings Plc (NASDAQ:ARM) experienced a dip on Monday, following a less than enthusiastic assessment from Bernstein. The renowned analyst firm initiated its coverage of the freshly public semiconductor company with an underperform rating, hinting at a potential overestimation of Arm’s role in artificial intelligence (AI) by some market participants.

The stock saw a significant drop of more than 9% during the trading session, hitting a low of $55.02, which is beneath its introductory price of $56.10 from its recent Thursday IPO. Despite this, the stock managed to recover somewhat, reducing the day’s loss to 4.5% and closing at $58 a share. A projected price target of $46 from Bernstein suggests further potential stumbling blocks ahead for the stock.

“While expectations that Arm will be a beneficiary from AI growth may be adding a premium to the share price, we believe it is too soon to declare them an AI winner,” Bernstein’s Sara Russo wrote in a Monday note to clients. “With the mobile end market maturing, we think expectations for top line growth are too optimistic.”

Bernstein is the third firm to initiate coverage on Arm, and the ratings so far have been diverse. Besides Bernstein’s underperform rating, New Street Research advises buying the stock, while Needham suggests a hold. Charles Shi, an analyst at Needham, credits Arm for establishing a robust smartphone ecosystem that essentially served as its protective barrier, granting Arm considerable leverage in pricing.

However, drawing parallels with Intel’s (NASDAQ:INTC) struggles to duplicate its success beyond the realm of personal computers, the analyst, who thinks Arm’s valuation looks “full,” warns that the chip designer could encounter difficulties outside the smartphone segment when high-performance computing usurps smartphones as the primary catalyst for growth in the semiconductor industry. This transition could pose challenges for Arm and potentially affect their standing in the market.

Hailing from Cambridge, UK, the company deviates from the typical chipmaker model. Instead of manufacturing chips, it supplies semiconductor blueprints to tech firms and reaps royalties from their implementation. Additionally, it holds the license for the essential technology that orchestrates the interaction between chips and software.

This positions the company as an influential entity with a presence in every significant tech corporation globally. However, the real challenge lies in leveraging this influence to boost its revenue streams. Russo expressed a measure of caution, stating that their perspective leans towards skepticism regarding the chip designer’s capacity to accelerate royalty rates at the speed indicated by its management.

Arm’s management is optimistic about hitting a 5% royalty mark by fiscal year 2026, but the timeline might be overly ambitious in Russo’s view. The analyst said her firm foresees a more gradual progression, with the semiconductor company nearing a 4% royalty rate by fiscal 2027. Following that, they predict a modest uptick in the subsequent years.

Reference: Bloomberg

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