Shares of Arm Holdings came under pressure after a sharp rally last month, as investor enthusiasm over its entry into chip manufacturing was tempered by a cautious assessment from Morgan Stanley.
Arm Holding’s stock fell 5.4% on Tuesday’s trading session.
The brokerage downgraded the stock to Equalweight from Overweight, sending it down more than 7% in early trading and prompting a reassessment of the company’s near-term prospects.
While Morgan Stanley raised its price target modestly to $150 from $135, the move signalled that recent gains may have run ahead of fundamentals, particularly as the company embarks on a complex and capital-intensive strategic shift.
Strategic pivot gains support but raises risks
Arm’s decision to design and sell its own chips marks a significant departure from its long-standing model of licensing semiconductor blueprints.
The company’s upcoming AGI CPU, aimed at artificial intelligence workloads in data centres, is expected to open up a multi-billion-dollar market opportunity.
“Arm’s move into chip making is strategically sound and aligns with the rise of agentic AI,” analysts led by Lee Simpson said, noting that AI systems increasingly rely on central processing units to coordinate complex tasks.
The initiative has already attracted major industry backing.
Meta Platforms has collaborated on the chip and signed on as its first customer, while OpenAI is also among the early adopters.
The company has forecasted that its AI chips will generate [MONEY value=”15000000000″ currency=”usd” notation=”long” replace=”false”] in sales and account for a major chunk of its business within five years.
However, analysts caution that executing such a pivot will not be straightforward.
Morgan Stanley cautioned that building a [MONEY value=”15000000000″ currency=”usd” notation=”long” replace=”false”] chip business isn’t easy, particularly at a time when Arm’s core smartphone-linked business is under pressure due to a memory chip supply crunch, which could weigh on the company’s short-term growth.
Tensions with existing customers emerge
Another key concern is the potential conflict with ARM’s existing licensing customers, many of whom develop their own data-centre processors.
Analysts warn that the company’s move into direct competition could strain relationships.
Some clients may seek to reduce reliance on Arm’s designs over time, though Morgan Stanley noted that switching costs and a lack of viable alternatives would likely make any transition gradual.
“Arm’s talent acquisition, strategic positioning, and early design delivery have been exemplary,” Simpson said.
“However, the commercial ramp will take time, and near-term risks temper enthusiasm.”
The brokerage expects Arm to report earnings of $1.60 per share for fiscal 2026 and $2.05 in 2027, both below market expectations.
However, it sees a sharp acceleration to $4.16 per share by 2028 as the chip business scales.
Morgan Stanley’s action in contrast to Mizuho’s
Despite Morgan Stanley’s cautious stance, other brokerages remain bullish on Arm’s long-term prospects.
Mizuho recently raised its price target to $230, citing significant upside from AI-driven demand.
The firm expects a 4-10x increase in CPU content in AI data centres as technologies such as ChatGPT and other agentic AI systems proliferate.
It also anticipates Arm gaining market share from traditional x86 processors due to better performance and cost efficiency.
Mizuho projects that Arm’s revenues could reach [MONEY value=”12000000000″ currency=”usd” notation=”long” replace=”false”] by fiscal 2031, with total addressable markets expanding sharply.
Its estimates suggest substantial earnings upside, supported by potential future announcements in AI-specific chips.
UBS maintains a Buy rating on the stock with a $175 price target, while Needham & Company has recently upgraded it to Buy with a $200 target.
Barclays also remains constructive, assigning an Overweight rating with a $200 price objective.
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