HSBC downgrades rating to "reduce" ahead of results! After the crazy surge in stock price, can Arm escape selling?
HSBC downgraded Arm Holdings' stock rating to "reduce" and is cautious about its prospects. Since 2023, Arm's stock price has risen sharply, but recently it has been affected by the sharp decline of global chip giants and market uncertainty, leading to a decline in its stock price. HSBC analysts believe that although Arm has good growth potential in the field of artificial intelligence, its stock price is already high, with a significant premium compared to other chip industry chains. This downgrade is also based on this consideration
According to the financial news app Zhitong Finance, international banking giant HSBC downgraded its rating on Arm Holdings (ARM.US), a leader in chip design, to "underweight" ahead of the release of the first quarter financial results for the 2025 fiscal year on Wednesday Eastern Time. Since the AI boom swept the globe in 2023, the footprint of the Reduced Instruction Set Architecture (ARM architecture) has spread from smartphones to AI data center servers. Tech giants such as NVIDIA and Microsoft have chosen to design their own server CPUs using ARM architecture. As a result, Arm Holdings from the UK, which went public in the US stock market last year, has been a focus of the market's attention. Since 2024, its stock price has risen by as much as 88%, and since its listing in September 2023, it has surged by 150%.
However, following the sharp decline of global chip giants such as NVIDIA and SK Hynix in July, Arm has also not been spared. After a 40% surge in June, the stock has fallen by over 15% since July. The main reason is that under the significantly increased expectations of a Fed rate cut, funds have flowed from AI hot stocks into long-suffering small and mid-cap stocks. Additionally, the market has sold off heavily AI-related popular tech stocks after observing uncertainties in the monetization prospects of tech giants like Google.
After HSBC released a bearish report on Arm and downgraded its stock rating, the stock price further declined, dropping by over 5% on Monday. Currently, it has fallen by more than 23% from its historical high since listing.
Analyst Frank Lee from HSBC expressed in the report that given the significant growth expectations related to artificial intelligence, Arm does have one of the best growth stories. However, with the stock price having surged by as much as 110% year-to-date and the expected P/E ratio for the 2026 fiscal year reaching as high as 72x, there is a significant premium compared to peers in the chip industry. Therefore, analyst Frank Lee downgraded HSBC's rating on Arm from "hold" to "underweight" but slightly raised the target price from $100 to $105. As of Monday's US market close, Arm's stock price closed at $141.44.
In addition to valuation being a core factor, analyst Lee from HSBC also expressed great concern about the slowing pace of profit expansion in the Android smartphone market. Lee added that other concerns include the growth narrative of AI PCs not being as optimistic as previously expected. Despite the increase in Arm's patent licensing fees, Lee cited mixed market feedback on Qualcomm's new ARM-based AI PC central processing unit and smartphone chips, as well as competition from the two x86 architecture giants AMD and Intel, which will further intensify in the AI PC era and AI data center expansion era.
It is understood that under the leadership of Masayoshi Son, SoftBank has been exploring ways to use Arm chip designs on a larger scale. Son hopes to create a large-scale new chip giant that complements Arm, which SoftBank controls, and aims to build an AI chip giant in the future with a scale and market share comparable to NVIDIA SoftBank is currently the largest shareholder of Arm, with a stake of nearly 90%.
SoftBank once suffered huge losses due to failed investments like Wework, but it has been profitable for several consecutive quarters. Behind this success is the significant profit brought by the investment in Arm. Arm can be seen as the latest investment masterpiece of Masayoshi Son after successfully investing in Alibaba many years ago, and Masayoshi Son is clearly prepared to continue to heavily invest in artificial intelligence.
Arm sells licenses for the most core instruction set architecture of almost all smartphone mobile chips globally, the Reduced Instruction Set Computing (RISC) processor architecture. While ARM architecture has been predominantly used in the smartphone field, it is now increasingly appearing in the field of personal computers and data center AI server chips. NVIDIA's self-developed Grace CPU is based on ARM architecture, Amazon's self-developed data center Graviton server processor also adopts ARM architecture, and Microsoft's latest self-developed customized AI chip Azure Cobalt 100, a server CPU, is also built based on ARM architecture, specifically designed to run cloud computing workloads on Microsoft Azure cloud servers. Riding on this global AI investment boom, Arm has surged by 88% so far this year, with a market value of up to $150 billion. The largest shareholder SoftBank holds a stake of nearly 90%, making it the biggest winner since Arm went public.
In terms of performance expectations, Wall Street analysts unanimously predict that for the fiscal Q1 of 2025 ending in June, Arm's adjusted earnings per share will reach $0.35, with an estimated total revenue of around $9.065 billion. In comparison, in the previous quarter, Arm's adjusted earnings per share were $0.36, with total revenue of around $9.28 billion.
Compared to the most negative rating of "reduce" given by HSBC and a 12-month target price of only $105, Wall Street analysts are generally more optimistic about Arm's rating and target price. The consensus rating compiled by Seeking Alpha's Wall Street analysts is "buy", but the target price is relatively cautious, with an average target price of around $126, significantly lower than Arm's current stock price, implying a general consensus decline of at least 11% within the next 12 months