On Thursday Eastern Time, technology stocks in the US stock market collectively suffered a heavy decline. Among them, the stock price of chip design giant Arm fell particularly sharply: Arm's stock price fell more than 9% during Thursday's trading session and ultimately closed down 8.48%.
Arm has been one of the biggest winners of this year's AI spending boom. However, on Thursday Eastern Time, well-known Wall Street investment bank Bernstein rarely lowered its rating on the company, which is also one of the key reasons for Arm's sharp decline in stock price on Thursday.
Bernstein rarely downgraded its rating
On Thursday Eastern Time, Bernstein analyst Sara Russo released the latest report, downgrading Arm's rating to "weaker than the market," which is essentially equivalent to a "sell" rating.
Her latest target price for Arm is $100. Even after Thursday's sharp drop, this target price is still about 30% lower than Arm's closing price on Thursday ($141.3).
This also means that Lasso has become one of the few analysts on Wall Street who are bearish on Arm. Less than 10% of Wall Street companies tracked by Bloomberg hold a bearish view on Arm, while nearly 60% of companies give Arm a "buy" recommendation.
The long-term prospects of (Arm) stock are still very attractive, "she wrote," but what is the price? Given the strong performance and valuation of the stock this year, it is difficult for us to find further upward space
Is the valuation of 'AI darling' too high?
Since the beginning of this year, Arm's stock price has surged by 88%, making it one of the undisputed "AI darlings".
Before Thursday's sharp decline, the company was the third highest rising stock price of the year among the constituent stocks of the NASDAQ 100 index, far outperforming most other constituent stocks of the index and most chip stocks in the US stock market. In contrast, the Nasdaq 100 index itself has risen by 21% this year, while the Philadelphia Stock Exchange Semiconductor Index has risen by 23%.
This strong stock price trend largely reflects Arm's position in the field of artificial intelligence. Last quarter, Arm's revenue far exceeded expectations, but investors have been disappointed due to the company's failure to improve its performance outlook.
Bernstein analysts have raised concerns about how much revenue Arm can generate beyond artificial intelligence, given the range of issues faced by companies in industries such as global automotive manufacturing.
Lasso et al. wrote in their report, "As is well known, most companies related to artificial intelligence are performing well. However, considering the cyclical headwinds, especially those outside of the memory business, we are concerned about Arm's revenue prospects for businesses other than AI in fiscal year 2025
The analyst wrote, "Taking all these factors into account, we believe that Arm is not immune to the impact of these cyclical adverse factors, especially in terms of patent fees
Lasso also lowered the company's revenue target for the fiscal year 2025 and added that Arm's stock valuation of 45 times fully diluted earnings per share in 2026 is "too high".