Arm Holdings slides as Morgan Stanley dowgrades

[Arm Holdings headquarters in Silicon Valley. Arm is a global semiconductor and software design company]
Michael Vi

Arm Holdings (ARM [https://seekingalpha.com/symbol/ARM]) shares fell 3.7% in premarket trading on Tuesday after Morgan Stanley downgraded the British semiconductor intellectual property firm to Equal-Weight from Overweight.

“Arm’s transition into chip making marks a structural evolution of its business model, aligned with the emergence of agentic AI,” Morgan Stanley analyst Lee Simpson wrote in a note to clients. “In an agentic world, GPUs (graphics processing units) generate and reason, while central processing units (CPUs) coordinate and execute. Always on, power-efficient CPUs therefore retain strategic relevance. Arm’s new AGI-oriented CPU design (specifically built for agentic AI workloads) demonstrates that the CPU is far from obsolete and reinforces the long-term rationale for deeper vertical integration (link). Arm’s talent acquisition, strategic positioning, and early design delivery have been exemplary. However, the commercial ramp will take time, and near-term risks temper enthusiasm.”

Simpson continued: “Post announcement, we think investor focus is likely to revert to Arm's in-line guide against a challenging demand backdrop. End market softness, compounded by DRAM supply constraints, could stymie near-term growth (FY27e). Margin dynamics are also in flux, with elevated R&D/engineering costs ahead of meaningful chip revenues. In addition, Arm’s entry into silicon increases the risk of channel conflict. Competing – directly or indirectly – with parts of its licensee base introduces the possibility of customer pushback, which we'd argue investors should not discount.”

In addition to the downgrade, Simpson lowered his price target on Arm to $150 from $185.

Last month, Arm introduced [https://seekingalpha.com/news/4568096-arm-unveils-data-center-cpu-as-it-looks-to-take-on-intel-amd] the Arm AGI CPU and said Meta Platforms (META [https://seekingalpha.com/symbol/META]) and OpenAI (OPENAI [https://seekingalpha.com/symbol/OPENAI]) would be its first two customers.

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