New Street Research: Arm (ARM.US) valuation has become too high, downgraded to "neutral" rating.

As of 2024, the stock price of the UK chip design company Arm (ARM.US) has risen by over 83%, with a price increase of over 95% since February. The rebound in Arm's stock price has led to its expected price-to-earnings ratio rising to 36.5 times, much higher than any constituent stock of the Nasdaq 100 index, and compared to its competitor Nvidia (NVDA.US), whose expected price-to-earnings ratio is less than 18 times. Arm's valuation seems to be too high, even some of the earliest bulls on the stock believe that the stock price has gone too far. The investment firm New Street Research, which was one of the first to rate Arm, downgraded the stock from "buy" to "neutral". Analyst Pierre Ferragu stated that to justify the current valuation, Arm "needs to achieve huge success in all areas". He said, "Even though we are more optimistic about the stock than market consensus, believing that the expected price-to-earnings ratio of the stock is 40 times, we see no reason to buy the stock at over $110." Arm fell 5.64% on Tuesday, closing at $137.95. Currently, among analysts tracked by Bloomberg, half recommend buying Arm, about 41% give a rating equivalent to "hold", and the remaining analysts are bearish. The average target price of analysts implies that Arm's stock price will drop by nearly 30%. Earlier this month, Arm announced better-than-expected performance for the third quarter of its 2024 fiscal year, while also raising its full-year performance guidance for the year. This pushed the stock to surge by nearly 48% on February 8th. The financial report showed that Arm's Q3 revenue increased by 14% year-on-year to $824 million, exceeding market expectations of $760 million. Under Non-GAAP accounting standards, operating profit was $338 million, up 17% year-on-year, exceeding market expectations of $274 million; net profit was $305 million, up 36%; diluted earnings per share were $0.29, exceeding market expectations of $0.25. Looking ahead, Arm expects its Q4 revenue to be between $850 million and $900 million, exceeding market expectations of $780 million; it expects Non-GAAP diluted earnings per share to be between $0.28 and $0.32, exceeding market expectations of $0.21. The company also expects full-year revenue for the 2024 fiscal year to be between $3.155 billion and $3.205 billion, higher than the previously expected $2.960 billion to $3.080 billion; Non-GAAP diluted earnings per share are expected to be between $1.20 and $1.24, also higher than the previous expected $1.00 to $1.10.