Monday Oct 16 2023 14:41
4 min
Shares in UK chip designer Arm Holdings have subsided following a brief uptick last week sparked by a series of "buy" recommendations from Wall Street analysts.
The wave of recommendations marked the end of a quiet period for around 30 banks involved in underwriting Arm's recent $4.87 billion initial public offering (IPO), making it the largest listing of the year.
The ratings from brokerages like J.P.Morgan and Goldman Sachs were a vote confidence in Arm's strategy to boost revenue by increasing royalty fees and expanding its presence in the cloud and automotive sectors.
As reported by Reuters, only brokerages not involved in the IPO could provide recommendations on the stock up until last Monday, and their views were more cautious due to concerns about the smartphone market’s decline and Arm's diversification efforts. According to LSEG data, three brokerages had a "hold" rating, and one had a "strong sell" rating on the stock.
Arm, a UK company based in Cambridge, primarily generates its revenue from the smartphone market, where it holds a 99% share across Android and iOS devices from Google and Apple.
Arm’s shares were trading at around $51 in premarket at the time of writing, mirroring the firm’s initial offering price and indicating a lack of upward momentum over the past three weeks.
A number of companies that went public this year are having trouble on the stock market — the most recent Birkenstock IPO failed to live up to expectations, as the German footwear company’s stock ended its first day of trading down 12.9% and was down 21% by the end of the week. The stock was down 0.9% in premarket trading on Monday.
A similar scenario has unfolded for Maplebear, the parent company of San Francisco-based grocery delivery firm Instacart. After debuting at $30 and surging 12% on the first day of the Instacart IPO, Maplebear stock has since declined to trade around the $25 mark.
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Despite the headwinds faced by Arm and other recent IPOs, a raft of key brokerages indicated they were optimistic on the company’s stock. The wave of ratings has yet to affect the firm’s share price.
A note to clients from Deutsche Bank cited by Investing.com read:
"We believe these strategic shifts and the higher royalty rates they can command should accelerate the company's revenue growth and further expand the valuation premium at which the company historically traded, based on the uniqueness and ubiquity of its technology ecosystem as well as the highly profitable and predictable nature of its business model.”
Deutsche Bank gave the stock a Buy rating and a price target of $60.
Goldman Sachs, which set a price target of $62, said it expected "Arm to not only expand on its presence in the smartphone market primarily through higher royalty rates, but to also extend its reach across applications to which it is under-indexed."
The brokerage and others including Citi and TD Cowen set price targets in the range of $57 to $85, with the most bullish view coming from Rosenblatt Securities.
However, some brokerages, including HSBC, have urged caution, saying Arm's shares could remain range-bound as uncertainty over a smartphone market recovery pressures earnings.
At least 17 brokerages are currently covering Arm shares, with an average rating of "buy" and a median price target of $63.50.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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