Arm Holdings shares came under pressure after HSBC downgraded the semiconductor designer to “hold” from “buy”, arguing that the company’s strong share price rally has already priced in much of its long-term artificial intelligence (AI) growth potential.
The stock closed 6% lower at $281.17 before recovering slightly in after-hours trading to $282.26, up 0.4%.
Despite the downgrade, HSBC raised its price target for Arm to $315 from $255, reflecting a roll-forward in its valuation based on fiscal 2029 estimates. However, the brokerage noted that the revised target represents only around 5% upside from Arm’s closing price of $298.99 on 13 July, suggesting limited scope for further gains.
HSBC said Arm’s shares have surged 122% since the company’s “Arm Everywhere” event in March, significantly outperforming the Philadelphia Semiconductor Index, which has risen 57% over the same period. The rally has been driven by investor optimism over Arm’s expansion into merchant server central processing units (CPUs) designed for AI data centres.
According to the brokerage, the pace of the share price appreciation has exceeded expectations and already reflects strong long-term earnings growth prospects.
While maintaining a positive long-term outlook for the company, HSBC warned that near-term earnings growth could be constrained by supply chain limitations.
The brokerage pointed to limited 3-nanometre manufacturing capacity at Taiwan Semiconductor Manufacturing Company (TSMC), which it said is restricting shipments of Arm’s AI server processors. HSBC expects significant additions to TSMC’s production capacity only in the second half of 2027 and believes the foundry is likely to prioritise existing customers when allocating the new capacity.
HSBC also highlighted Arm’s rich valuation, estimating the company is trading at approximately 139 times its expected fiscal 2027 earnings and 95 times its projected fiscal 2028 earnings.
It said the current valuation already factors in management’s ambitious AI strategy, including its long-term targets of generating $25 billion in revenue and achieving non-GAAP earnings per share of $9 by fiscal 2031.
The brokerage concluded that although Arm remains well positioned to benefit from the growing adoption of AI technologies over the longer term, its current valuation leaves little room for additional upside in the near future.
