On Tuesday, New Street Research adjusted its stance on Arm Holdings (NASDAQ:ARM), changing the stock's rating from Buy to Neutral. The firm's analysts cited future earnings forecasts and inherent risks as the reasoning behind the decision.
They project that Arm Holdings will achieve an Earnings Before Interest and Taxes (Ebit) of $3.8 billion in FY28, which is 5% higher than the consensus expectations among analysts.
The report from New Street Research highlighted several factors that could potentially influence Arm Holdings' financial performance. These include a possible doubling of the average royalty rate in smartphones, as well as an increase in the company's market share within the datacenter and PC sectors. Despite these opportunities, the analysts expressed reservations about the company's ability to deliver a 15% per annum return for investors.
The analysts elaborated on their valuation concerns, indicating that even with a forward price-to-earnings multiple of 40x projected for the year 2027, the stock's performance would not meet their criteria for a Buy rating if it remains above $110. The focus on the stock's future price potential and earnings power was central to their revised outlook.
New Street Research's assessment reflects a cautious approach to Arm Holdings' stock, taking into account both the potential for growth and the risks that could impact the company's profitability. The downgrade serves as an adjustment to the firm's expectations of the stock's investment returns in the coming years.
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