Investing.com — Analysts at Bernstein have downgraded their rating of Arm Holdings (NASDAQ:ARM) to "Underperform" from "Market-Perform," citing concerns about near-term "cyclical headwinds" facing the chip designer.
The analysts added that while the long term equity story remains "very appealing," there are still worries around the revenues Arm can generate outside of artificial intelligence given a host of issues facing firms in sectors like automaking and technology. These industries rely on processors often made using Arm's designs.
"Putting all of this together, we do not believe that Arm is immune to these cyclical headwinds when it comes to royalties, specifically — although the long term story remains very attractive in our view," the analysts wrote.
For the upcoming quarterly results due out on Nov. 6, they subsequently cut their expectations for royalties and licensing. UK-based Arm generates royalties through each chip sold using its technology and also charges licensing fees for its semiconductor designs.
The analysts slashed their fiscal year 2025 top-line target for the company as well. They added that Arm's stock valuation of 45 times 2026 fully-diluted earnings per share is "too steep."
In a note to clients on Thursday, the analysts led by Sara Russo noted that Arm's share price has climbed by nearly 40% since they last upgraded the stock almost a quarter ago.
Arm's shares have recovered from a slide in late July sparked by a conservative revenue outlook, which exacerbated investor fears that returns from a rush of spending on AI would be slower to materialize for the company than other semiconductor firms like Nvidia (NASDAQ:NVDA) or Advanced Micro Devices (NASDAQ:AMD).
Speaking in a conference call after the announcement, CEO Rene Haas flagged that it can about four years for Arm to realize windfalls from AI server chip designs it has licensed this year.
Shares in SoftBank-backed Arm sank by more than 6% in early US trading on Thursday, although the stock price has more than doubled so far this year.
(Reuters contributed reporting.)
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