BofA slashes Arm Holdings target to $260 on valuation concerns

BofA Securities cut its Arm Holdings price target to $260 from $460, a 43% reduction, citing valuation concerns after the stock fell more than 20% in the past week.

"Arm posted modestly better results for its June and September quarters, driven by continued share and content gains in AI and data center markets, offset by near-term smartphone weakness," the BofA analysts said in a note.

The new target reflects a sum-of-parts valuation that values the intellectual property business at 2.0x PEG, or about $203 per share, and the chips business at 21x earnings, or about $57 per share. BofA maintained its Neutral rating on the stock, which trades at a price-to-earnings ratio of 278. The firm raised its fiscal 2027 and 2028 estimates modestly on continued licensing growth and a higher AGI supply outlook for fiscal 2028.

The downgrade adds to pressure on Arm, which has lost more than a fifth of its value over the past week as investors reassess the chip designer's valuation against near-term headwinds including smartphone weakness and supply constraints. The stock closed at $224.89 on Tuesday, down 8.1%, implying about 16% upside to BofA's new target.

The move follows a separate price target cut from Wells Fargo, which lowered its target to $280 from $350 on Wednesday while maintaining an Overweight rating, citing multiple compression across the semiconductor sector. Wells Fargo now expects Arm to post fiscal 2027 revenue of $6 billion and earnings per share of $2.21, rising to $7.88 billion and $3.00 in fiscal 2028.

Arm has benefited from rising demand for its chip designs in AI data centers, with the company reporting 25% revenue growth over the past 12 months and gross profit margins of 97.5%. The company's AGI CPU products, including the Axios and Cobalt designs under its CSS lineup, are ramping in fiscal 2027 and 2028, while its new AGI chiplet CPUs represent a growth avenue. Arm has disclosed more than $2 billion in AGI demand and expressed confidence in delivering more than $1 billion in revenue from the segment in fiscal 2027 and 2028.

The price target cuts show Wall Street is tempering expectations for Arm's near-term upside despite its long-term AI opportunity. Investors will watch for the company's next earnings report for updated guidance on AGI CPU shipments and licensing revenue.

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