Arm Stock Falls After HSBC Downgrade, Citing Limited Near-Term AI Upside

Arm Holdings shares came under pressure after HSBC downgraded the semiconductor designer to "hold" from "buy,"arguing that the company’s recent rally has already priced in much of its long-term artificial intelligence (AI) growth potential.

Arm stock ended Tuesday down 6% at $281.17 before recovering slightly in after-hours trading to $282.26. Although HSBC raised its price target to $315 from $255, the brokerage said the revised target reflects updated fiscal 2029 estimates and offers only about 5% upside from Arm’s July 13 closing price of $298.99.

According to HSBC, Arm shares have surged 122% since the company’s "Arm Everywhere" event in March, significantly outperforming the Philadelphia Semiconductor Index, which gained 57% over the same period. The rally has been fueled by investor optimism surrounding Arm’s expansion into merchant server CPUs designed for AI data centers.

Despite maintaining a positive long-term outlook, HSBC believes Arm’s near-term earnings growth could face challenges. A key concern is the limited availability of 3-nanometer chip manufacturing capacity at Taiwan Semiconductor Manufacturing Co. (TSMC), which is restricting production of Arm’s AI server processors.

The brokerage expects meaningful additions to TSMC’s manufacturing capacity only in the second half of 2027. It also anticipates that TSMC will prioritize long-standing customers when allocating new production capacity, potentially delaying broader shipments of Arm-based AI chips.

HSBC added that Arm’s premium valuation leaves little room for further upside. The firm estimates the stock is trading at approximately 139 times projected fiscal 2027 earnings and 95 times projected fiscal 2028 earnings. Those multiples already reflect management’s ambitious AI strategy, including its goal of generating $25 billion in revenue and non-GAAP earnings per share of $9 by fiscal 2031.

While Arm remains well positioned to benefit from the expanding AI semiconductor market over the long term, HSBC believes its current valuation fully captures that opportunity, making additional gains more difficult in the near future.