As investor enthusiasm dimmed in the year’s largest initial public offering (IPO), Arm Holdings shares fell 4.6% on Tuesday, their third daily fall in four days as a listed firm.
After hitting $69 on Friday, the stock traded at $55.31 as short sellers profited. The chip designer, in which Softbank (9434.T) owns 90%, finished at $63.59 on Thursday, about 25% higher than its IPO price of $51.
As higher bond yields hurt technology growth, arm shares underperformed the Philadelphia semiconductor index (.SOX), which fell 0.7% on Tuesday.
Instacart, another high-profile IPO, rose to $36.91 in its inaugural session from $30.
Redburn Atlantic, an equity research and trading company, initiated coverage of ARM with a “neutral” rating and $50 price target on Tuesday, arguing that current valuations require “higher conviction in a multi-year earnings acceleration from a weak (full year 2023) base.”
Bullish investors are betting on the stock’s rise because of AI interest, but Synovus Trust portfolio manager Daniel Morgan wants more confirmation in Atlanta, Georgia.
Morgan’s business owns Nvidia (NVDA.O) but not Arm. “People are sobering up a little bit from the initial excitement,” he added.
“Valuation and investors buying ARM because it’s an AI play is my biggest concern. The money manager said AI helps it, but not Nvidia. We don’t have direct evidence that AI has directly benefited ARM as we do from Nvidia.”
On Tuesday, Ortex data showed that short sellers were betting against Arm stock, with little more than 5 million shares of the freshly listed chip designer “on loan,” or 2.7% of its free float.
Ortex says short sellers borrow stocks to short them, and the link between loaned and shorted shares is usually close.
Starting with new stock, “there is often a lot of data missing, so there is a reasonable expectation that the real number is higher,” Ortex co-founder Peter Hillerberg emailed.
Ortex reports Arm’s average cost to borrow at 12.76%. Ortex said that Tesla (TSLA.O), which has a similar percentage of shorted shares, has a 0.48% borrowing cost.
Arm’s increased borrowing cost, Hillerberg said, “can be an indication that the demand to borrow, and short, the stock is high.”
In recent days, Bernstein and Needham’s analysts had written less-than-optimistic notes about the chip technology company, and options on the stock started trading on Monday at a fast rate, with many investors expecting a significant fall.
Arm reported late Monday that its underwriters had exercised their entire over-allotment option to buy 7 million American depository shares (ADSs), raising the IPO’s total to $5.2 billion.
