A PRONOUNCED rally in Arm Holdings has resulted in a sky-high valuation, to the point that even one of the chip-design company’s first stock bulls thinks it has gone too far.

New Street Research downgraded the stock to neutral from buy, a move that comes after a massive move in the share price this month.

Justifying the current valuation “would require extreme success” on all fronts, wrote analyst Pierre Ferragu. “Even with a generous 40x multiple on our above-consensus expectations, we don’t see a rationale to buy Arm above US$110.” The stock closed at US$137.95 on Tuesday (Feb 27), down 5.6 per cent on the day, though it remains up 95 per cent over the month of February.

The more cautious view from New Street is notable, as it was an early advocate of the stock. It started coverage on Arm in September, ahead of the pricing of the initial public offering, and it was the first firm tracked by Bloomberg to issue a rating.

Currently, half the analysts tracked by Bloomberg recommend buying the stock, while about 41 per cent have the equivalent of a hold rating and the rest are bearish. The average analyst price target suggests a downside of almost 30 per cent.

February’s rally for Arm was sparked by a powerhouse forecast and earnings report, which triggered a one-day jump of 48 per cent. The company touted the growth potential of artificial intelligence (AI), which chief executive officer Rene Haas said was “not in any way, shape or form a hype cycle”.

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Subsequent gains came after Nvidia issued a bullish forecast of its own, cementing how AI remains a powerful growth tailwind and a theme that investors cannot get enough of.

The rally has resulted in a hefty multiple. Arm is priced at 36.5 times the revenue projected over the next 12 months, making it far more expensive than any component of the Nasdaq 100 Index. Nvidia, in contrast, is priced below 18 times forward sales. BLOOMBERG