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

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.

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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."

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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%.

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

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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."

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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.

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

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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."

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