With such a great reputation, is it difficult to live up to it? As investors' initial enthusiasm dissipated, Arm, the world's largest IPO this year, has been listed for four days. In addition to rising sharply on the first day, it has closed down for three consecutive trading days. On Tuesday (19th), it fell 4.9% to close at US$55.17. It closed at US$63.59 on its first day of listing last Thursday.
For now, bears still appear to be eyeing the stock and preparing to continue shorting. Data from analytics company Ortex on Tuesday (19th) showed that short sellers have begun to bet on Arm’s shares, with more than 5 million shares “lent”, accounting for 2.7% of its outstanding shares. Ortex said short sellers often need to borrow shares before they can go short, and the relationship between borrowing shares and shorting them is often very close. Ortex data also shows that Arm’s average borrowing cost, or borrowing rate, is currently 12.76%.
Ortex co-founder Peter Hillerberg said that in comparison, Tesla and Arm have a similar proportion of shorted stocks, but their borrowing costs are only 0.48%, and higher borrowing costs "may indicate higher borrowing demand for the stock."
Many institutions have also begun to lower their stock price expectations for Arm.
On Tuesday, equity research and trading firm Redburn Atlantic gave Arm a "neutral" rating and a $50 price target. The company said that to recommend Arm at its current valuation, it would require "higher confidence in Arm's earnings acceleration in the coming years on the basis of Arm's weak full-year earnings forecast for 2023."
Some optimistic investors are optimistic about Arm, mainly hoping that the market's surge in interest in artificial intelligence will increase demand for its products, but Daniel Morgan, a portfolio manager at trust company Synovus Trust, said he needs more evidence to support this expectation. The company owns Nvidia but has not yet invested in Arm.
"Most investors are starting to wake up a little from the initial excitement." Morgan said, "My biggest concern is valuation. In addition, almost all investors who bought Arm were optimistic about it because of the artificial intelligence boom. But at present, we do not have any direct evidence that Arm can obtain the direct positive impact of the artificial intelligence boom like Nvidia."
Thomas Martin, senior portfolio manager of the investment institution GLOBALT Investments, said that after a new stock is listed, there will usually be some initial fluctuations. And when the excitement fades, its performance will depend on "metrics coming up relative to its end market and end users."
Analysts from two other well-known Wall Street investment institutions, Bernstein and Needham, have also recently issued less optimistic reports on Arm, saying that options trading on the stock has surged since Monday, with many investors betting that the stock will continue to fall.
Previously, the market had hoped that the largest IPO of the year would reignite the U.S. IPO market, which has been sluggish for two years. The U.S. IPO market has been in difficult times over the past two years, pressured by high U.S. inflation and high interest rates from the Federal Reserve. Statistics show that so far this year, the financing scale of U.S. IPO transactions is only US$14.2 billion, a 94% drop from the record financing level in 2021.
David Kostin, chief U.S. equity strategist at Goldman Sachs, wrote in a report titled "IPO Market Opens!" that Arm's listing can trigger further IPO activity. "The U.S. IPO market reopened dramatically this week after a two-year drought."
Goldman Sachs CEO David Solomon also said: "There are some very important IPOs on the market. If these IPOs go smoothly, a virtuous cycle will be formed and more backlogged IPOs can be brought to the market."
No matter how Arm's stock price performs, it has indeed sent a "warm breeze" to the U.S. IPO market. Another high-profile IPO, online grocery delivery company Instacart, closed on its first day of trading on Tuesday at $33.70, about 12% higher than its IPO price of $30. Marketing and data automation provider Klaviyo also took advantage of the situation to increase its IPO price range from US$25 to US$27 per share to US$27 to US$29, and will also be listed on the New York Stock Exchange later this week.
However, Kerstin added, "Investors should still consider valuation, because generally, companies with high price-to-sales ratios (price/sales multiples) at IPO rarely outperform the market subsequently."
Measured in terms of price-to-sales ratio, Arm's valuation is not cheap, with a price-to-sales ratio of about 20. Among Philadelphia Semiconductor Index stocks, only Nvidia has a higher price-to-sales ratio. At its opening price of $42, Instacart was valued at six times its annual sales, while DoorDash, which was listed as a competitor in its IPO filing, had a price-to-sales ratio of 4.1 times.