Arm Stock Is Dropping After Blockbuster IPO. Why It Could Fall Further.

text size

Shares of Arm Holdings were trading lower early Monday. The chip-design firm’s initial public offering was a big hit, but there are reasons to be cautious about the stock from now on.

Arm

(Symbol: ARM ) was down 0.7% at $60.34 in premarket trading. Last week, demand around the IPO pushed the price above $66, giving up huge gains.

However, the stock remains well above the $51-a-share price, which was at the high end of the expected range. Arm is valued at more than $60 billion and at a higher price-to-earnings ratio than its peers in the semiconductor industry — even an artificial intelligence favorite.

Nivea

( NVDA ) That has some market analysts taking a dubious line about its future prospects.

“If the deal is six times oversubscribed, it looks like investors saw the Arm IPO as an AI play and forgot to look at the price tag,” wrote Daniel Morgan, senior portfolio manager at Synoves Trust.

Morgan said that while ARM could be central to the transition to AI-enabled computing, the current market for semiconductors in PCs and tablets is shrinking against a strong economic backdrop and low technology innovation. That creates challenges for Arm to move beyond the mainstream mobile phone market, and many of its opportunities rest on gaining market share in the data center and automotive markets.

One big factor that will determine the future direction of ARM stock is how the majority is owned.

SoftBank Group

(9984.Japan) uses a 90% share in the company.

The stock in the Japanese company rose slightly on the back of the Arm IPO. That’s because SoftBank CEO Masayoshi Son said the company intends to remain a long-term owner of Arm, limiting SoftBank’s potential profits but reducing selling pressure on Arm stock.

However, that doesn’t mean you can’t find other ways to use logo ownership. The Financial Times reports that it is exploring AI investments and that Arm may use stocks as collateral to boost its financial firepower.

Arm will have to deliver an impressive performance to please SoftBank and its IPO investors. Analysts at Susquehanna Financial Group beat Arm’s fair estimate by $48 billion to $50 billion ahead of the company’s listing, allowing for a premium for other chip stocks. A blockbuster debut does not guarantee continued success.

Write to Adam Clark at [email protected]