According to Bernstein, there are several factors that suggest Arm Holdings stock may be overvalued. These factors include rising competition, a mature phone market, and China-related risk.
On Monday, analyst Sara Russo initiated coverage for Arm stock (ticker: ARM) with an Underperform rating. She set a target price of $46, which implies a decline of 24% from Friday’s closing level. This rating represents Arm’s first negative rating from Wall Street.
AI Market Challenges
Russo expressed doubts about declaring Arm as an AI winner. She highlighted that the mobile and consumer end markets, which account for nearly 60% of Arm’s revenues, continue to present challenges.
Arm’s Revenue Model
Arm generates revenue by licensing its chip architecture and other chip designs to semiconductor companies and hardware makers.
In its initial public offering, Arm listed its stock for trading at $51 per share. This triggered a surge in the price, with the stock closing at $63.59. However, the price dropped to $60.75 by the end of Friday and further declined by 6.3% to $56.92 on Monday following the release of the Bernstein report.
Arm has not yet provided a response to the Bernstein note.
The Growing Threat to Arm: The Rise of RISC-V
The chip industry is undergoing a significant shift as the open-source RISC-V architecture gains traction. Unlike Arm, which charges royalty fees for its chip architecture, RISC-V is free to use. This key difference has led manufacturers to embrace RISC-V, just as they have done with other successful open-source products like the Linux operating system.
According to an analyst, RISC-V is quickly emerging as a credible alternative to both x86 and Arm for certain applications. This poses a serious challenge to Intel’s x86 architecture and forces the industry to reassess the long-term viability of current processor architectures.
Arm, whose revenue heavily depends on its presence in China, faces additional hurdles due to the rise of RISC-V. With 24% of its revenue coming from China, the company is vulnerable to escalating tensions between Washington and Beijing. Moreover, China’s favoring of non-Western technologies and its independent operation of Arm China pose further threats to Arm’s long-term growth prospects.
Notably, Arm no longer has a direct stake in Arm China. In 2022, the company transferred its 48% ownership to a subsidiary of SoftBank, resulting in a loss of management rights. However, Arm China continues to operate independently.
Overall, the rise of RISC-V and Arm’s exposure to China’s market dynamics present significant challenges to the company’s future growth. As the industry navigates these shifts, it becomes crucial to consider alternative processor architectures and their potential impact in the long run.