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.”
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.
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.
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.