The Ratings Game: Arm’s stock already draws a bearish call: ‘It is too soon to declare them an AI winner’

Typically investors need to wait a few weeks to get stock coverage of a company that recently went public, but an analyst at Bernstein, which didn’t help underwrite the initial public offering, has already weighed in with a bearish rating on shares of Arm Holdings PLC.

“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. “In addition, we remain more conservative on their ability to deliver increased royalty rates at the pace management is guiding.”

U.S.-listed shares of Arm
began trading Thursday, and they closed Friday at $60.75, 19% above their $51 IPO price. The stock is off more than 3% in Monday’s premarket trading.

Russo said she sees room for downside on shares of the chip designer, initiating coverage with an underperform rating and $46 target price.

She expressed caution about the longer-term royalty picture for Arm. “While [Arm’s management is] signaling reaching 5% royalties by FY26, we anticipate it takes longer to reach that,” she wrote. “We expect them to be approaching ~4% by FY27 and see [room for a] modest increase after that.”

Russo said she is also concerned about RISC-V, an open-source rival to Arm’s technology.

“Open source software has proved a successful model, with Linux as an example of an open-source alternative that grew into a sizable commercial success,” Russo wrote.

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She wrote that she views RISC-V as a Linux for the hardware market, and expects that companies could establish themselves as specialists in the technology, helping others capitalize.

“Much like Red Hat was able to develop a very successful commercial operation enabling enterprises to take advantage of all the benefits of open-source in a scalable way, we believe that the plethora of RISC-V specialists are likely to breed a number of ‘Red Hats’ that are able to make a commercial success of basing their designs on RISC-V,” she continued.

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FactSet listed Russo as one of three analysts who already cover Arm’s stock.

“Arm’s architecture is a foundation of smartphones, but we believe the world is entering a post-smartphone era that will see high-performance computing and IoT lead the next phase of semiconductor growth,” Needham’s Charles Shi wrote last week, in beginning coverage with a hold rating.

FactSet indicated the third analyst — Pierre Ferragu of New Street Research — has a bullish stance.

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