Arm Holdings stock was falling on Monday. The chip-design firm’s initial public offering was a big hit late last week, but there are reasons to be cautious about the stock from now on.
In midmorning trading, shares of Arm (ticker: ARM) were down 6.5%, $56.97. It has given up significant gains since demand around its IPO last week briefly pushed the price above $66 a share.
However, the stock remains well above the $51-a-share pricing of the offer, which was itself at the high end of the expected range. Arm is valued at more than $60 billion and at a considerable premium on a price-to-earnings basis to peers in the semiconductor industry — even artificial-intelligence favorite Nvidia (NVDA). That has some market commentators taking a skeptical line on its future prospects.
“With the deal six times oversubscribed it looks like investors viewed the Arm IPO as an AI play and forgot to look at the price tag,” wrote Daniel Morgan, senior portfolio manager at Synovus Trust, in a research note.
Morgan said that while Arm is likely to be central to the transition toward AI-enabled computing, the current market for semiconductors in PCs and tablets is stagnating against a tough economic background and low technological innovation. That poses challenges for Arm’s hopes to move beyond its core mobile phone market and could mean more of its prospects rest on gaining market share in data centers and the automotive market.
Arm’s reliance on the mobile phone market is a core reason for being wary about the stock, according to Bernstein’s Sara Russo, who started coverage with an Underperform rating and $46 target price.
“With the mobile end market maturing, we think expectations for top line growth are too optimistic,” Russo wrote.
One big factor determining the direction of Arm’s stock in the future is how its majority owner SoftBank Group (9984. Japan) will use the 90% stake it retains in the company.
Stock in the Japanese company only rose slightly on the back of the Arm IPO. That might be due to the fact that SoftBank CEO Masayoshi Son said that the company intends to remain the long-term owner of Arm, limiting SoftBank’s potential gains but also reducing the selling pressure on Arm’s stock.
However, that doesn’t mean it might not find other ways to leverage its ownership of Arm. The Financial Times reported that it is exploring AI investments and could use Arm shares as collateral for loans to boost its financial firepower.
Arm will need to deliver an impressive performance to keep SoftBank and its IPO investors happy. Analysts at Susquehanna Financial Group put Arm’s fair valuation at $48 billion to $50 billion ahead of the company’s listing, even allowing for a premium to other chip stocks. A blockbuster debut doesn’t guarantee continued success.
Write to Adam Clark at [email protected]
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