By Nate Wolf
Arm Holdings made a bold move last month by unveiling a plan to build its own data-center chips. The pivot makes sense, according to Morgan Stanley, but it may take awhile for shareholders to reap the rewards.
Morgan Stanley downgraded Arm to Equalweight from Overweight in a research note Tuesday. The firm nudged its price target up to $150 from $135 but that is little consolation for investors who haven't bought up shares yet.
U.S.-listed depositary receipts of the British company dropped 7.2% to $138.12 on Tuesday. Arm didn't immediately respond to a request for comment from Barron's.
Arm stock soared 19% in March as the company revealed its first-ever central processing unit, or CPU, developed in collaboration with Meta Platforms. Best known for licensing chip designs for phones, Arm forecast that its artificial-intelligence chips will generate $15 billion in sales and account for the majority of its business within five years.
"Arm's move into chip making is strategically sound and aligns with the rise of agentic AI," Morgan Stanley analysts led by Lee Simpson wrote Tuesday. Crucially, the computing behind AI agents requires CPUs to coordinate and execute tasks, Simpson added.
But building a $15 billion chip business isn't easy, and Arm is starting off at a challenging moment for its core business. In particular, the supply crunch for memory chips has weakened the smartphone market, which could limit the company's short-term growth, Morgan Stanley argued.
The entry into chip making also introduces some tricky dynamics with current licensing customers that make their own data-center CPUs. Analysts at BofA Securities pointed out this potential conflict last month.
These licensees could choose to lessen their reliance on Arm's designs, though doing so would be difficult and require a slow, multi-year shift due to a lack of premium alternatives, Morgan Stanley said.
The firm projects Arm will post earnings of $1.60 a share when it reports fiscal 2026 earnings next month, and $2.05 a share in fiscal 2027. Both numbers are below Wall Street consensus. But earnings will explode to $4.16 a share in 2028 as the chip business ramps up, Morgan Stanley estimated. That number is up from a previous forecast of $3.88.
"Arm's talent acquisition, strategic positioning, and early design delivery have been exemplary," Simpson said. "However, the commercial ramp will take time, and near-term risks temper enthusiasm."
Write to Nate Wolf at nate.wolf@barrons.com
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April 07, 2026 10:46 ET (14:46 GMT)
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