Morgan Stanley Downgrades Rating, ARM Stock Plummets 7%

Investing.com - British chip design company Arm Holdings ADR (NASDAQ:ARM) shares fell more than 7% on Tuesday, after Morgan Stanley cut its rating for the stock from “Buy” to “Hold/Wait-and-See,” saying that although the company remains a core player in the AI transformation, the financial gains brought by “agentic” AI may take longer than the market currently expects to materialize.

However, the analysts raised the stock’s price target for the Nasdaq-listed company from $135 to $150, despite taking a more neutral stance on the stock’s near-term performance.

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The focus of this downgrade is the industry’s shift to “agentic AI,” autonomous systems that can handle complex tasks with minimal human intervention. Although Arm’s architecture may support the hardware needed for these technological advances, Morgan Stanley believes royalty revenue growth driven by such technology is a longer-term outlook.

“Arm’s new design is a shift in the business model that could change the revenue mix, but also change the margin profile. In short, we believe Arm’s chip plans are well-timed and strategically coherent. While the long-term outlook remains compelling, this transformation introduces execution, competitive, and cyclical risks,” the analyst said in a report to investors.

“The agentic transition is coming, but the timing and magnitude of any near-term royalty improvement may be more gradual,” the analyst noted.

However, the analyst highlighted several of Arm’s fundamental strengths, especially its efforts to expand into the cloud, which have helped it gain market share in the data center space, as more and more cloud service providers customize chips based on Arm’s blueprint designs.

Despite the semiconductor industry’s outlook still being “attractive,” the analyst noted that Arm’s stock price has risen rapidly over the past year, leaving less room for tolerance of execution missteps.

This rating downgrade underscores a broader trend among Wall Street analysts, who are beginning to take a cautious stance toward AI-related stocks, as the sector worries that major technology companies’ large-scale capital deployments into AI infrastructure could create potential bubbles.

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