Shares of Arm (ARM) fell in premarket trading Monday following a successful debut day that valued the company at over $65 billion.

Arm

Shares of Arm rallied 25% at its long-awaited market debut on September 14, bringing the company’s valuation to more than $65 billion. However, the stock experienced a pullback on Monday, dipping up to 4% in the premarket after Bernstein’s analysts set the price target of $46 apiece, 24% lower than the Friday closing price of $60.75.

ARM Down 4% in Monday Premarket

Following a successful debut day on Sept. 14, shares of chipmaker ARM embarked on a downward trajectory in premarket trading Monday. The stock was down up to 4% in the market pre-op at $58 per share.

The drop comes after ARM witnessed an impressive 25% surge at its initial public offering (IPO), with the initial selling price of $51 apiece. The stock ended the day at $63.59, taking the chip manufacturer’s valuation to $65 billion. 

Arm’s successful listing provided investors with necessary relief following a nearly 2-year drought in the IPO market. The stock’s debut day victory gave confidence to Instacart – a delivery company also set to go public in September – to raise its IPO target price.

The demand for IPOs has hit the bottom after the 2021 euphoria, mainly due to record-high interest rates imposed by the global central banks to fight peaking inflation last year. Interestingly, even though Arm attracted robust investor interest, the stock is unlikely to be included in major stock market indices and exchange-traded funds (ETFs) due to several issues. 

Analysts Cautious on Arm’s Massive Valuation

Meanwhile, the decline in the Monday premarket points to reasons for Arm’s investors to be cautious, signaling potential downside risks. At its hefty valuation of over $60 billion and a significant premium on a price-to-earnings basis to other chipmakers, some market watchers have taken a more prudent stance regarding the stock’s prospects. 

“With the deal six times oversubscribed it looks like investors viewed the Arm IPO as an AI play and forgot to look at the price tag.”

– said Daniel Morgan, senior portfolio manager at Synovus Trust.

Meanwhile, Bernstein analyst Sara Russo sees cloud computing as a potential growth catalyst for Arm. The strategist predicts Arm chips will account for 15% of the cloud computing market in 2025 from 10% last year. However, the company will need much more than that to live up to the expectations the market has now set. 

Russo wrote last week in a note to investors that Arm’s current valuation “is driven primarily by their ability to realize royalty pricing increases.” The strategist valued the company at $46 billion, nearly 30% less than its IPO closing price. 

Bernstein rated ARM’s stock as “Underperform” after the Thursday listing, setting a price target of $46 per share. 

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