Shares of red-hot U.K. semiconductor design firm Arm Holdings (NASDAQ:ARM) had an impressive IPO, surging more than 25% on opening day. Since peaking at around $68 and change, however, the IPO boom seems to have gone bust in the past few days. The stock is now under $53. Undoubtedly, it’s not hard to imagine that many Arm investors are looking to get a front-row seat to massive gains, the likes of which haven’t been seen since Nvidia (NASDAQ:NVDA).
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Given the frenzy surrounding AI-enabling semiconductor companies, Arm stock’s stellar first day on the public markets should come as no surprise. As the market terrain gets rockier going into year’s end, patient investors may just be able to get a better price of admission into the latest hot chip stock.
Perhaps a price below the IPO level of $51 could be in the cards as valuations across the broader tech scene look to contract further. It’s been a rough September for stocks, and more of the same could be in the cards for October. For now, I’m inclined to maintain a bearish stance and enjoy the Arm show from the sidelines, as I don’t think the stock can provide a shot in the arm at today’s incredibly frothy multiples.
ARM Stock is Still Expensive
Despite its recent sell-off, ARM stock is still far from cheap at 20.4 times price-to-sales (P/S) and nearly 140 times trailing price-to-earnings (P/E), both of which are well above the semiconductor industry averages. Further, ARM stock still seems way too expensive at its IPO price, which, at this rate, may be tested in just a few days! A certain group of momentum chasers may be upbeat on ARM stock, but Wall Street certainly is not — not at today’s price of admission.
Bernstein analyst Sara Russo slapped ARM stock with its first “Sell” rating alongside a price target of $46 per share, well below the IPO price. Although Arm has some skin in the AI game, Russo thinks it’s “too soon” to say that Arm is “an AI winner.”
I think Russo will be proven correct. We’re likely still in the very early stages (perhaps the infancy) of the AI boom, and there are sure to be competitors duking it out to grab the largest slice of the AI pie.
Russo also noted that the open-source RISC-V chip architecture may be a potential threat to Arm. Though I’m unsure if it’s RISC-V or some other architecture that challenges Arm’s dominance, the competitive risks are worth weighing before committing an investment to Arm.
For now, though, if Arm is good enough for Apple (NASDAQ:AAPL) — it designs Apple’s custom chips — it seems to be good enough for a lot of early ARM shareholders.
Don’t Expect an Nvidia-Like Pop
Make no mistake, Arm is a frontrunner with a pretty wide moat, just like Nvidia. And that makes its shares worth some premium to the peer group — though probably not to the magnitude of more than 20 times P/S. Still, Arm is the company that’s enabled firms, like iPhone maker Apple, to design their own custom chips. Just two weeks ago, Arm extended its partnership with Apple beyond 2040.
Clearly, there’s ample value to be had in Arm’s architecture as hardware makers race to maximize per-watt performance to gain an edge over rivals. Add AI to the equation, and it seems like Arm cannot lose as the AI race moves forward. That said, investors ought to temper their expectations.
At this juncture, it seems highly unlikely that AI can give Arm a similar shot in the arm — not after it started out of the gate at an already-elevated $51 per share. Further, Arm’s AI exposure is limited versus the likes of a GPU and APU maker such as Nvidia, at least for now. Currently, Arm stands as a more viable contender in the mobile sector rather than AI, given that today’s advanced models, such as ChatGPT, primarily operate within cloud infrastructures rather than being housed on individual smartphones.
Is ARM Stock a Buy, According to Analysts?
On TipRanks, ARM stock comes in as a Hold. Out of four analyst ratings, there is one Buy, two Holds, and one Sell recommendation. The average ARM stock price target is $51.67, implying downside potential of 2.3%. Analyst price targets range from a low of $46.00 per share to a high of $59.00 per share.
The Bottom Line on ARM Stock
Although Arm is a semiconductor stock with some skin in the AI game, that’s where most of the similarities with Nvidia end. At the end of the day, ARM stock’s lofty price tag and baked-in AI hype could work against it as markets look to take a breather from here.
