HSBC on Monday downgraded ARM Holdings (ARM) shares to a Hold rating, pointing to a potential slowdown in the Android smartphone market and less optimistic expectations for the AI sector.
Despite ARM's significant year-to-date stock price increase of 116%, HSBC expressed concern over the company's short-term earnings, particularly ahead of its first-quarter 2025 results due on July 31.
ARM's current price-to-earnings (P/E) ratio for fiscal year 2026 ending in March (FY26e) stands at 72x, which represents “a significant premium relative to its large-cap semiconductor peers,” analysts at HSBC noted.
Analysts conceded the positive outlook for ARM's royalty payments per chip, especially with AI PC CPUs expected to double from 5% to 10% of the average selling price (ASP), and a higher per-core ASP rising from $0.50 to $1.00.
However, they highlighted the uncertainty surrounding the total addressable market (TAM) for units. Moreover, initial feedback on Qualcomm's AI PC Arm-based CPU performance post-launch has been mixed, and competition from AMD (NASDAQ:AMD) and Intel (NASDAQ:INTC) is intensifying.
Analysts also highlighted their expectations of a decline of 15% in China's Android handset sales, which could contribute to ongoing smartphone market weakness into the September quarter.
“Hence, we see potential short-term earnings downside risk to Arm given our 2Q25e (Sept quarter) sales YoY growth of -1% remains more conservative than consensus of +1% YoY growth, given smartphones still account for >60% of Arm sales,” they wrote.
In light of these factors, HSBC has revised its EPS forecasts for FY25 and FY26 downward by 3% and 2%, respectively, to reflect the anticipated challenges. The firm has set a new target price (TP) for ARM at $105.
“Our TP implies 29.5% downside; hence, we downgrade the stock to Reduce from Hold. However, we also acknowledge that there could be share price downside protection given limited liquidity of only a 10% free float,” analysts at HSBC said.