Arm Holdings stock may be overvalued given increased competition, a maturing mobile phone market and China-related risks, Bernstein said.
Analyst Sara Russo initiated coverage on ARM stock (ticker: ARM) on Monday with an Underperform rating and a $46 price target. This represents a 24% decline from Friday’s closing level. According to FactSet, this is the first time that Arm has been rated the same as a “sell” by Wall Street.
“It’s too early to declare.” [Arm as] AI wins,” she wrote. She added: “Mobile and consumer end markets account for nearly 60% of her revenue, and both continue to be challenged.”
Arm makes money by licensing its chip architecture and other chip designs to semiconductor companies and hardware manufacturers.
On Thursday, Arm listed its shares for trading, setting an initial public offering price of $51 per share. This caused a sharp rise in the price, with a closing level of $63.59. Shares closed Friday at $60.75, but fell 6.3% to $56.92 following the Bernstein report early Monday morning.
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Mr. Arm declined to comment on Mr. Bernstein’s memo.
The analyst said the open source RISC-V chip architecture is becoming an increasing threat to Arm because manufacturers can use it for free without paying royalty fees. She pointed to how open source products have been successful in other areas of the computer industry, using the Linux operating system as an example.
“We believe RISC-V is rapidly gaining credibility as an alternative to x86 and Arm in some applications,” he wrote, referring to Intel’s x86 chip architecture. “The latest prospects for processor architecture require serious consideration of its feasibility and long-term presence.”
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He said Arm’s large exposure to China, at 24% of sales, and the rise of RISC-V could threaten the company’s long-term growth rate. Rising tensions between the U.S. and China, a lack of control over Arm China, and China’s preference for using non-Western technology could pose headwinds for the company.
Arm has no direct stake in Arm China. Arm will transfer 48% of its shares to a SoftBank subsidiary in 2022 and currently has no management rights. The company said Arm China operates independently from the company.
Email Tae Kim at tae.kim@barrons.com.