Arm Holdings plc (NASDAQ:ARM) shares fell Tuesday after Morgan Stanley struck a more cautious tone on the company's AI-driven transition, dialing back near-term expectations even as long-term prospects remain intact.

The firm downgraded the stock to Equal-Weight from Overweight while lifting its price target to $150 from $135, signaling a more balanced risk-reward outlook.

Analyst Take

Morgan Stanley analyst Lee Simpson said Arm's push into chip development aligns with the rise of agentic AI but introduces execution risks in the near term.

He pointed to strong early progress, including talent acquisition and initial product delivery, but warned that slow commercial scaling and rising costs could limit upside. Simpson also flagged DRAM supply constraints and potential conflicts with existing licensees as factors that may cap valuation at $150.

Simpson described Arm's move into silicon as a structural shift tied to evolving AI workloads, noting that CPUs will remain central in coordinating increasingly autonomous systems. He added that Arm's AGI-focused CPU roadmap supports its long-term relevance and deeper ecosystem integration.

Growth Headwinds And Margin Pressure

However, he cautioned that chip revenue will take time to scale, while elevated research and engineering expenses could pressure margins in the interim. Demand softness and memory-related constraints may also weigh on growth through fiscal 2027.

The analyst warned that Arm's entry into chipmaking could create friction with licensing partners, as increased overlap may trigger customer pushback.

Simpson said the stock now reflects a sum-of-the-parts framework, applying a 30x EBIT multiple to the IP business and 15x to the chip segment. He outlined key risks to upside, including DRAM shortages, the outcome of Qualcomm-related litigation, and shifts in licensee strategies.

Financial Outlook And Long-Term Projections

Looking ahead, Simpson said clearer visibility into licensing growth and successful product launches could support sentiment. He expects chip revenue to reach about $1.2 billion by fiscal 2028 with 40% gross margins, though profitability may lag initially. Over time, margins could exceed 30% by fiscal 2031 as scale improves.

He projects total revenue of $9.28 billion and EPS of $4.16 in fiscal 2028, rising to $31 billion in revenue and $16.30 in EPS by fiscal 2031.

ARM Price Action: Arm Holdings shares were down 4.75% at $141.71 at the time of publication on Tuesday, according to Benzinga Pro data.

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