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The Stock of Arm is Already Drawing a Bearish Call: 'it is Too Soon to Declare Arm a Winner in Ai'

September 18, 2023
minute read

Investors traditionally encounter a waiting period of several weeks before receiving comprehensive stock coverage for a recently public company. However, an analyst at Bernstein, despite not participating in the initial public offering, has proactively issued a bearish assessment on Arm Holdings PLC's shares.

Sara Russo of Bernstein conveyed her perspective in a client note dated Monday: "While there are expectations that Arm will reap benefits from the growth in artificial intelligence, potentially contributing to a premium in its share price, we are of the opinion that it is premature to designate them as a definitive AI success story. Furthermore, we maintain a more cautious outlook regarding their capacity to achieve the elevated royalty rates at the pace outlined by the management."

Arm Holdings' U.S.-listed shares (ARM) commenced trading last Thursday and concluded Friday at $60.75, a notable 19% above their initial IPO price of $51. In the early hours of Monday's pre-market trading, the stock exhibited a decline of more than 3%.

Russo, projecting a potential downside for the chip designer's shares, initiated coverage with an "underperform" rating and established a target price of $46.

Her concerns are predominantly centered on Arm's long-term royalty outlook. Russo commented, "While Arm's management has indicated reaching a 5% royalty rate by FY26, we anticipate that achieving this milestone may take a longer duration, possibly approaching approximately 4% by FY27 with only modest increases thereafter."

Additionally, Russo expressed reservations about the emergence of RISC-V, an open-source competitor to Arm's technology. Drawing parallels with the success of open-source software, she likened RISC-V to a Linux for the hardware market. She anticipates that companies specializing in this technology could establish themselves as industry leaders, akin to the success of Red Hat in the open-source software domain.

FactSet has identified Russo as one of three analysts actively covering Arm's stock.

Charles Shi of Needham, in the preceding week, initiated coverage with a "hold" rating and offered an insightful perspective on Arm's future. He stated, "Arm's architecture has served as a cornerstone of smartphones, but we believe that the world is entering a post-smartphone era where high-performance computing and the Internet of Things (IoT) will spearhead the next phase of semiconductor growth."

Bryan Curtis
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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