Arm Holdings stock is having a terrible week.
The chip design firm's stock is off more than 30%, during a rough week for tech overall as well.
Adding fuel to the fire, BNP Paribas analyst David O'Connor on Friday reduced his rating on Arm stock to Neutral from Outperform, while keeping his target price at $100.
ARM shares on Friday dropped 16.9% to $87.19.
O'Connor's downgrade reflects his cautious stance on the stock ahead of the company's May 8 earnings report.
He notes that Wall Street consensus forecasts for 25% revenue growth in the March 2025 fiscal year -- including 40% royalty growth -- provide "little room for upside surprise."
The analyst says the company needs to do more than provide in-line guidance for the full year when the stock is trading "at a premium." Arm trades at 65 times earnings estimates for fiscal 2025, and 25 times expected revenue of $4 billion. (The company is likely to provide full year fiscal 2025 guidance on the coming earnings call.)
While Arm is gaining exposure in some new markets, it still generates about 40% of its royalty revenue from smartphones, and that revenue source could see some weakness, O'Connor adds.
"While smartphone inventory replenishment was a big driver of royalty outperformance over the last two quarters, we understand that this is fading given comments from Taiwan Semiconductor on a softer calendar Q2 in handsets," he writes. O'Connor also notes that mobile phone chip suppliers are expecting a "flattish" second half of the year compared to the first half in China.
O'Connor does say that he expects Apple to adopt Arm's most recent processor design -- known as V9 -- for chips used in the iPhone 16 -- which is expected to launch this fall. That should give results a boost in the December 2024 and March 2025 quarters, he says. He also sees a tailwind from two new server processors, Microsoft's Cobalt and Google's just-announced Axion.
But he doesn't think that those new factors will do enough to drive up guidance to the Street's satisfaction.
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