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Arm Holdings (NASDAQ:ARM) shares rose 0.5% in premarket trading on Tuesday even as New Street Research downgraded the British chip design firm, citing an “unattractive risk reward” at current levels.
If the company were at the “top of its game,” shares could trade at 35 to 40 times fiscal 2028 earnings before interest and taxes in 2027, a team of analysts, led by Pierre Ferragu, argued. The stock is already past that level, they added.
By comparison, some of Arm’s peers in the semiconductor space, including ASML (ASML), Cadence Design Systems (CDNS) and Synopsys (SNPS), trade between roughly 35 and 40 times enterprise value to EBIT.
Arm, which designs chip intellectual property that is then used by companies such as Apple (AAPL), Nvidia (NVDA), AMD (AMD) and others, would need to beat quarterly estimates by at least 50% “for the stock to work sustainably from here,” the analysts said.
Arm shares have surged in recent memory, gaining 100% over the past month and 130% over the past six months, leading the firm’s analysts acknowledge that their downgrade comes with some risk, including if the average royalty rate in smartphones doubled and it made gains in the datacenter and PCs.
“We would see a rationale to buy the stock today only if it can deliver a 15% [price appreciation] return,” the analysts wrote. “Even with a 40x forward multiple in 2027, we don’t see that possible with the stock above $110.”
Analysts are largely bullish on Arm (ARM). It has a HOLD rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha’s quant system, which consistently beats the market, has no rating on ARM.
