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On Thursday, HSBC analyst Frank Lee revised the price target for Arm Holdings (NASDAQ:ARM) shares, reducing it to $95.00 from the previous $115.00, while maintaining a Reduce rating on the stock. Currently trading at $124.19 with a market capitalization of $130.9 billion, ARM shows mixed signals. According to InvestingPro analysis, the stock appears overvalued compared to its Fair Value, despite showing strong momentum with a 7.62% return over the past week. Lee’s assessment pointed to a significant potential downside in the company’s fiscal year 2026 earnings, citing necessary investments for future growth that Arm Holdings is anticipated to make.
Arm Holdings has not provided explicit revenue guidance for fiscal year 2026 due to limited customer visibility and ongoing uncertainty surrounding tariffs. The company has demonstrated strong historical performance, with revenue growing 25.73% over the last twelve months and maintaining an impressive gross margin of 96.37%. Lee forecasts that the company’s year-over-year sales growth for FY26 may slow to 18%, compared to a 24% growth observed in FY25. This deceleration is expected to be due to subdued year-over-year growth in both royalties and licensing, projected at 21% and 16% for FY26, down from 29% and 20% respectively in the previous fiscal year. For deeper insights into ARM’s growth metrics and valuation, InvestingPro subscribers have access to over 10 additional key financial indicators and expert analysis.
Despite the anticipated slowdown, Arm Holdings is expected to increase its research and development (R&D) spending to drive future growth, particularly in its Compute Subsystems (CSS) segment. This strategic investment is likely to result in higher operating expenses, with a forecasted year-over-year increase of 28% in FY26 compared to a 19% increase in FY25.
Consequently, the EPS (earnings per share) growth for FY26 is projected to be a modest 3%, a stark contrast to the 29% growth reported for FY25. Lee suggests that it may be too early to re-rate Arm Holdings based on an expected recovery in FY27, where year-over-year EPS growth is anticipated to rebound to 30%. This cautious outlook by HSBC reflects uncertainties in the company’s near-term financial performance amid its ongoing investments for long-term growth.
In other recent news, Cadence Design (NASDAQ:CDNS) Systems announced its intention to acquire Arm Holdings’ Artisan foundation IP business. This strategic move is aimed at enhancing Cadence’s design IP offerings and expanding its presence in system-on-chip designs. The acquisition, which includes standard cell libraries and memory compilers, is expected to close in the third quarter of 2025, pending regulatory approvals. Meanwhile, Arm Holdings reported strong revenue and earnings per share for the December quarter, surpassing market expectations. Despite these results, the company’s guidance for the March quarter aligned with projections, which tempered stock price reactions.
In analyst updates, Loop Capital raised its price target for Arm Holdings to $195 while maintaining a Buy rating, citing optimism about the company’s fiscal year 2026 prospects. Conversely, Bernstein reiterated its Underperform rating with a price target of $100, despite acknowledging Arm’s strong licensing revenue growth. Arm Holdings is also in the midst of a legal dispute with Qualcomm (NASDAQ:QCOM) over alleged anti-competitive behavior, with a court-ordered mediation set for May. Additionally, Arm has begun recruiting from its customer base to sell its own chips, marking a significant shift in its business strategy.
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