Arm has been one of the biggest winners in this year's ai spending boom, but the well-known Wall Street investment bank Bernstein has surprisingly downgraded its rating on the company; Arm's stock price fell more than 9% in Thursday trading and ultimately closed down 8.48%.
Finance News Network reported on November 1st (Editor: Liu Rui) On Thursday, US technology stocks collectively plummeted in Eastern Time. Among them, chip design giant Arm's stock price suffered particularly heavy losses: Arm's stock price fell more than 9% in Thursday trading and closed down 8.48%.
Arm has been one of the biggest winners in this year's ai spending boom. However, on Thursday Eastern Time, the well-known Wall Street investment bank Bernstein surprisingly downgraded its rating on the company, which is also one of the key reasons for Arm's sharp drop on Thursday.
Bernstein Rarely Downgrades Rating
On Thursday Eastern Time, Bernstein analyst Sara Russo released a new report, downgrading Arm's rating to 'underperform the market,' which is essentially equivalent to a 'sell' rating.
Her latest target price for Arm is $100. Even after the sharp drop on Thursday, this target price is still about 30% lower than Arm's Thursday closing price ($141.3).
This also means that Russo has become one of the few analysts on Wall Street with a bearish outlook on Arm. Of the Wall Street firms tracked by Bloomberg, less than 10% have a bearish view on Arm, while nearly 60% have a 'buy' recommendation on Arm.
"The long-term prospects for Arm stock are still very attractive," she wrote, "but at what price? Given the strong performance and valuation of the stock this year, we find it hard to see further upside potential."
"AI darling" valuation too high?
Since the beginning of this year, Arm's stock price has soared by 88%, making it one of the well-deserved "AI darlings".
Before the significant drop on Thursday, the company was the third-highest gainer among the constituents of the Nasdaq 100 Index in the U.S. stock market, far outperforming most other components of the index, as well as most chip stocks in the U.S. Compared to this, the Nasdaq 100 Index itself rose by 21% year-to-date, while the Philadelphia Semiconductor Index rose by 23%.
Such a strong stock price performance largely reflects Arm's position in the field of artificial intelligence. In the last quarter, Arm's revenue exceeded expectations, but investors have been disappointed as the company failed to improve its performance outlook.
Bernstein analysts expressed concerns about how much revenue Arm can generate outside of artificial intelligence, considering a series of challenges faced by companies in industries like global autos manufacturing.
Raso and others wrote in their report: "It is widely known that most companies related to artificial intelligence perform well. However, considering cyclical headwinds, especially beyond memory business headwinds, we are concerned about Arm's revenue prospects in the fiscal year 2025 beyond AI."
Analysts wrote, "Taking all these factors into account, we believe that Arm will not be immune to these cyclical headwinds, especially in terms of patent fees."
Raso also lowered the company's revenue target for the fiscal year 2025 and added that Arm's stock valuation at 45 times fully diluted earnings per share in 2026 is "too high".
