Investing.com — shares were under pressure after HSBC downgraded the stock to “hold” from “buy”, saying the chip designer’s sharp rally has already priced in much of its long-term AI growth potential, leaving limited room for further upside.

Arm shares closed down 6% at $281.17 on Tuesday before edging 0.4% higher in after-hours trading to $282.26.

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The brokerage raised its price target to $315 from $255, reflecting a roll-forward in its valuation to fiscal 2029 estimates, but said the new target implies only about 5% upside from Arm’s July 13 closing price of $298.99.

HSBC noted that Arm shares have surged 122% since the company’s “Arm Everywhere” event in March, far outpacing the 57% gain in the Philadelphia Semiconductor Index, as investors embraced its expansion into merchant server CPUs for AI data centres. The brokerage said the rally has exceeded its expectations and already discounts robust long-term earnings growth.

While HSBC remains positive on Arm’s long-term prospects, it said near-term earnings upside is constrained by limited 3-nanometre foundry capacity at TSMC, which is restricting shipments of Arm’s AI server CPUs. The brokerage expects meaningful capacity additions only in the second half of 2027 and believes TSMC is likely to prioritise existing customers when allocating new production.

HSBC estimates Arm trades at a lofty 139 times fiscal 2027 earnings and 95 times fiscal 2028 earnings, arguing the valuation already reflects management’s ambitious AI roadmap, including a target of $25 billion in revenue and non-GAAP EPS of $9 by fiscal 2031.