Arm Holdings (ARM) shares took a tumble Tuesday after HSBC downgraded the stock, adding to a broader pullback in AI and semiconductor names as investors took profits in richly valued stocks.

The decline came despite mixed analyst commentary, with HSBC turning cautious even as KeyBanc became more bullish on Arm's long-term growth prospects.

HSBC Flags Valuation Risks

HSBC analyst Frank Lee downgraded Arm to Hold from Buy while raising his price target to $315 from $255. Lee said the enthusiasm around Arm's expanding role in CPUs has pushed the stock well ahead of fundamentals.

While he acknowledged the company's long-term growth opportunity, he argued that much of that upside is already reflected in the share price, leaving limited near-term upside.

KeyBanc Sees Bigger Server Opportunity

In contrast, KeyBanc analyst John Vinh maintained an Overweight rating and lifted his price target to $430 from $300, citing a larger long-term opportunity in Arm-based server CPUs.

Vinh said near-term smartphone demand could remain constrained by memory shortages. However, he expects agentic AI to drive stronger adoption of Arm-based server processors, including NVIDIA's Vera, Amazon's AWS Graviton, and Alphabet's Google Axion.

He also said Arm's potential move into designing server CPU silicon for customers could expand its addressable market, supporting as much as $25 billion in revenue and more than $9 in earnings per share by fiscal 2031.

Earnings Outlook

Investors are also preparing for Arm's next earnings report, scheduled for July 29. Wall Street expects earnings of 36 cents per share, up from 35 cents a year earlier, on revenue of $1.27 billion, compared with $1.05 billion last year.

The stock trades at roughly 352 times trailing earnings, reflecting its premium valuation.

ARM Price Action

Arm Holdings shares were down 6.35% at $279.99 at the time of publication on Tuesday.