Arm Holdings saw its shares slide on Wednesday after HSBC downgraded the British chip designer to Hold from Buy, warning that the stock's meteoric rise on the back of artificial intelligence enthusiasm has left it trading ahead of its fundamental prospects.
The Cambridge-based company, whose chip architecture powers the majority of the world's smartphones and is increasingly used in data centres for AI workloads, fell more than 3% in London trading. The decline made Arm one of the biggest drags on the FTSE 100, which slipped 0.4% to 8,215 points in mid-afternoon trading.
HSBC analysts argued that while Arm remains a key beneficiary of the AI boom, the recent share price surge — which has more than doubled over the past year — already reflects expectations of rapid earnings growth for several years ahead. The bank's move follows similar caution from other brokers who have questioned whether AI-related stocks have become overbought.
The downgrade comes amid a broader reassessment of the AI sector, with investors increasingly scrutinising whether high valuations are justified by actual revenue and profit growth. For UK pension holders and retail investors, Arm's weighting in the FTSE 100 means the stock's performance has an outsized impact on index-linked savings and funds.
Analysts at several City firms have noted that while Arm's licensing and royalty revenue streams are growing, the pace of adoption for its latest chip designs in AI servers may take longer than markets currently anticipate. The company is due to report quarterly results in early August, which will provide a clearer picture of its earnings trajectory.