Arm Holdings shares fell more than 6% on Tuesday after HSBC downgraded the chip designer to Hold, saying foundry capacity constraints are likely to limit earnings upside despite the company’s strong long-term growth prospects.
The brokerage still raised its price target to $315 from $255.
With Arm trading around $286, HSBC sees upside over the longer term but believes much of the company’s growth story has already been reflected in its share price.
Foundry capacity bottlenecks limit near-term upside
“We have previously flagged that Arm’s entry into merchant server CPUs and higher server CPU royalties could be transformative,” HSBC analyst Frank Lee wrote in a note to clients.
According to HSBC, investor enthusiasm around Arm’s server CPU ambitions has exceeded expectations since the company’s Arm Everywhere event in March.
“The market reaction to the merchant server CPU narrative has exceeded our expectations, with the stock trading +122% since the Arm Everywhere event on 24 March (vs. SOX +57% during the same period),” Lee said.
“With management targeting $25B of revenue and $9 non-GAAP EPS by FY31E, we think the shares already price-in strong long-term growth, trading at an expensive 139x/95x 2026e/2027e PE. We therefore roll our valuation forward to FY29e, which drives our target price revision. However, foundry capacity bottlenecks limit near-term earnings upside, so we downgrade to Hold.”
Lee added that additional foundry capacity remains the primary catalyst for further upside but appears unlikely in the near future.
“Given incremental foundry capacity allocation being the primary upside catalyst, which we believe is unlikely, we downgrade to Hold due to limited earnings upside potential.”
The downgrade marks a reversal from HSBC’s stance in March, when it double-upgraded the stock from Reduce to Buy while lifting its price target to $205 from $90.
At the time, the brokerage argued that Arm was transitioning from a smartphone-focused licensing company into a major supplier of CPU architecture for AI servers and remained undervalued.
Other analysts remain bullish
Not all brokerages share HSBC’s cautious view.
Last month, Bernstein analyst David Dai raised the firm’s price target on Arm to $500 from $300 while maintaining an Outperform rating.
Dai described Arm as a structural beneficiary of the “renaissance of CPUs for agentic AI,” citing the architecture’s power efficiency and the company’s evolution from an intellectual property licensor into a CPU developer.
TD Cowen also lifted its price target to $475 from $265 while reiterating a Buy rating, reflecting confidence that AI-driven computing demand will continue to support the stock.
Arteris expands partnership with Arm
Separately, Arm announced an expanded partnership with semiconductor technology provider Arteris to strengthen processor security.
Arteris said Arm will continue integrating its Cycuity Radix technology into processor core development to enhance semiconductor security assurance.
Arteris Chief Executive K. Charles Janac said that by leveraging the company’s technology, Arm is building more rigorous security capabilities at a time when semiconductor cybersecurity is becoming increasingly important for electronic systems, including data centres.
Shares of Arteris rose more than 3% following the announcement.
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