What happened
Shares of Arm Holding plc (ARM 0.02%) retreated this week, falling 14.1% on the week through Thursday trading, according to data from S&P Global Market Intelligence.
Arm, which owns one of the two main IP licensing platforms for all computing processors, went public last week on Thursday as the first technology IPO in a long time.
Though the stock surged when going public, ending the week about 19.1% higher than its IPO pricing of $51, this week saw the stock give up basically all of those post-IPO gains, as skeptical analysts (including yours truly) weighed in.
NASDAQ: ARM
Key Data Points
So what
On Monday, research firm Bernstein weighed in on Arm's stock with an "underperform" rating. In the note, analyst Sara Russo noted some of the same risks I did in a recent analysis, including Arm's rich valuation at over 100 times earnings, competitive risks from open-source alternatives, overstated near-term AI exposure, and a worrying distance between the main company and its Chinese subsidiary, Arm China.
The week didn't get much better when another sell-side firm, Redburn Atlantic, initiated coverage on Arm with a "neutral" rating and a $50 price target the next day. For those who follow sell-side notes, "neutral" may sound two-sided, but it's really usually a more pessimistic rating that tends to lead to selling pressure. The analyst voiced skepticism mostly over the company's high valuation, which seemed to already factor in a reacceleration of growth that may or may not happen.
And of course, this week's Federal Reserve meeting, in which Fed officials raised their 2024 expectations for the federal funds rate, hurt all technology stocks Wednesday and Thursday, Arm included. That's because everything else being equal, higher longer-term interest rates depress the value of growth stocks, with the bulk of their earnings far out in the future.
Now what
Even with this week's decline, Arm's stock still sits slightly above its IPO price as of this writing. And while it's possible the company will be able to meaningfully accelerate AI revenues in the latest version of its platform called v9 ISA, it's still unclear as to what extent Arm will be able to grow overall in the near term. As of now, the vast majority of revenues come from mobile phones -- a mature business seeing lengthening refresh cycles.
At over 100 times trailing earnings, that's a pretty steep price to pay for a stock with both risks to its growth picture and geopolitical concerns -- especially if long-term interest rates go higher from here.
