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Shares in chip-design company Arm Holdings (NASDAQ:) dipped 5% in trading on Monday morning to $57.73 after a significant surge in demand following its initial public offering (IPO) last week. The IPO had momentarily boosted the share price above $66, indicating strong investor interest.
Despite the recent drop, Arm’s stock performance remains robust, staying well above the $51 per share offer price. As a result, Arm’s valuation now surpasses $60 billion, marking a substantial premium on a price-to-earnings basis compared to other semiconductor industry players, including AI leader Nvidia (NASDAQ:).
The market’s response to Arm’s IPO, which was oversubscribed sixfold, underscores the company’s perceived significance in the AI sector. However, Daniel Morgan, a senior portfolio manager at Synovus (NYSE:) Trust, highlighted that the current semiconductor market for PCs and tablets is witnessing sluggish growth due to economic challenges and limited technological innovation.
This stagnant market poses challenges for Arm as it seeks to broaden its reach beyond its primary mobile phone sector. The company’s future may increasingly hinge on gaining market share in data centers and the automotive industry.
The future course of Arm’s stock will also be shaped by how SoftBank (TYO:) Group, its majority owner with a 90% stake, chooses to manage its shares. Although SoftBank only saw a marginal increase in its stock following Arm’s IPO, CEO Masayoshi Son has expressed his intention to remain a long-term owner of Arm. This decision could curtail SoftBank’s potential profits but might also reduce selling pressure on Arm’s stock.
Nevertheless, SoftBank may consider other strategies to leverage its ownership of Arm. Reports suggest that it might use Arm shares as collateral for loans to bolster its financial strength while pursuing AI investments.
To retain the confidence of both SoftBank and its IPO investors, Arm will have to demonstrate exceptional performance. Analysts from Susquehanna Financial Group estimated Arm’s fair value at $48 billion to $50 billion ahead of its listing, even considering a premium over other chip stocks. The initial success of the IPO does not guarantee sustained performance in the future.
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