Arm Holdings (NASDAQ: ARM) saw its shares close down by 4.9% on Tuesday, marking the third daily decline in the stock’s first four sessions as a publicly listed company. This downturn comes as investor interest wanes in what was the year’s largest initial public offering (IPO) thus far.
As short sellers eye profit opportunities, Arm’s stock closed at $55.17 after briefly reaching a high of $69 on Friday. The chip designer, of which Softbank (OTC: SFTBY) holds approximately a 90% stake, previously closed at $63.59 on Thursday, a nearly 25% increase over its IPO price of $51.
Arm shares underperformed the Philadelphia Semiconductor Index, which closed down by 0.96% on Tuesday, with rising bond yields applying downward pressure on growth sectors like technology.
Investor attention was also divided as the high-profile IPO of grocery delivery service Instacart concluded its debut session at $33.70, around 12% above its $30 IPO price.
On Tuesday, equity research and trading firm Redburn Atlantic initiated coverage of ARM with a “neutral” rating and a $50 price target, citing the need for “higher conviction in a multi-year earnings acceleration from a weak (full year 2023) base” to justify recommending ARM at current valuations.
While optimistic investors pin their hopes on the stock’s potential tied to the surge in interest in artificial intelligence (AI), Daniel Morgan, portfolio manager at Synovus (NYSE: SNV) Trust in Atlanta, expressed the need for more concrete evidence.
“People are sobering up a little bit from the initial excitement,” noted Morgan, whose firm holds Nvidia (NASDAQ: NVDA) shares but has refrained from investing in Arm. He added, “My biggest concern is valuation and the fact that everyone is buying ARM because it’s a huge AI play in the eyes of investors. It does benefit from AI, but it’s not Nvidia. We don’t have any direct evidence at this point that ARM has been directly positively impacted by AI like we have from Nvidia.”
Thomas Martin, senior portfolio manager at GLOBALT Investments in Atlanta, acknowledged that some initial volatility was expected with a new asset in the market. However, he emphasized that, over time, the stock would be evaluated based on the metrics associated with its end markets and users.
Data from analytics company Ortex on Tuesday indicated that short sellers had started taking positions against Arm stock, with just over 5 million shares of the newly listed chip designer “on loan,” equivalent to 2.7% of the stock’s free float. Normally, there is a close relationship between shares on loan and shorted shares, according to Ortex co-founder Peter Hillerberg, who also mentioned that “there is often a lot of data missing with a new stock, so there is a reasonable expectation that the real number is higher.” Currently, Arm’s average cost to borrow, representing the interest rate for borrowing, stands at 12.76%, as reported by Ortex. In comparison, Tesla (NASDAQ: TSLA), a stock with a similar percentage of shorted shares, has a cost to borrow of 0.48%, according to Ortex. Arm’s higher cost to borrow “can be an indication that the demand to borrow and short the stock is high,” Hillerberg said.
Recent analyst notes from Bernstein and Needham have been less than optimistic about the chip technology company, and options on Arm’s stock began trading briskly on Monday, with many investors positioning for further downside.
Late on Monday, Arm announced that its underwriters had fully exercised their over-allotment option to purchase an additional 7 million American Depository Shares (ADSs), increasing the total raised from the IPO to approximately $5.2 billion.
Another IPO on the horizon is marketing automation company Klaviyo Inc, which is considering pricing its offering at the top of its indicated price range or slightly above it, according to sources familiar with the matter. The pricing for this IPO is expected to be set on Thursday evening.
