Arm’s stock falls below the IPO price, as another analyst says don’t buy

Since ending its first-day of trading at $63.59 on Sept. 14, or 24.7% above its IPO price, the semiconductor design company’s stock has tumbled 20.1% amid a six-day losing streak, to wipe out about $13.1 billion in market capitalization.

Read: Klaviyo, Instacart and Arm Holdings’ stocks mixed as shine comes off recent crop of IPOs.

On Friday, Susquehanna analysts Chris Rolland and Mehdi Hosseini suggested the stock could fall even further, as they launched co-coverage of Arm with a neutral rating and a $48 stock price target, which is 5.9% below the IPO price. Susquehanna was not one of the 26 brokers listed as underwriters of Arm’s IPO.

Read: Arm’s stock already draws a bearish call: ‘It is too soon to declare them an AI winner.’

The analysts provided different perspectives on the company but neither recommended buying: “[O]ur investment conclusions are consistent, and the stock is currently fairly valued.”

Rolland expressed concerns that Arm appears far more interested in pushing the limits of royalty growth, even if it pushes customers to look for alternative ISAs (instruction set architectures) and design architectures.

Also, the company plans to augment its revenue through less profitable “subsystems” services.

“While we think new opportunities like ‘subsystem’ optimization represents an interesting new avenue for revenue, we note this should come with higher expenses and lower margins, given the engineering intensity of developing and supporting new custom product,” Rolland wrote in a note to clients.

Hosseini said that for Arm to achieve a goal of 20% revenue growth a year, it has to boost blended licensing and royalty average selling prices by 3% a year, the shipment of chips needs to increase by 8% a year and new revenue opportunities, such as new system products have to grow from the current $0 to about $1 billion by fiscal 2027.

The risks Hosseini saw include alienating current customers as the company looks to ramp up new system opportunities, increasing competition and the fact that China accounts for about 20% to 25% of core licensing and royalty revenue.

“We see the stock having fairly valued risk/reward,” the analysts said. “The company appears to be pushing royalty rates to the limit, while also adding lower margin ‘subsystems’ revenue.”

Of the five brokers that cover Arm, including Susquehanna and four that were surveyed by FactSet, just one was bullish, while three were neutral and one was bearish. Based on MarketWatch calculation using FactSet data, the average price target is $51.

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