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Arm shares face a third daily loss as enthusiasm for the IPO fades and short sellers are in limbo

In this illustration dated March 6, 2023, a smartphone with an Arm Ltd logo displayed is placed on a computer motherboard. REUTERS/Dado Ruvic/Illustration/File Photo Acquire License Rights

Sept 19 (Reuters) – Arm Holdings shares fell 4.6% on Tuesday, on track for their third daily decline in the stock’s first four sessions as a listed company, as investor interest in its biggest initial public offering ( Arm Holdings’ IPO has slowed so far this year.

As short sellers looked to profit from the stock, it was last trading at $55.31 after hitting a high of $69 on Friday. The chip designer, in which Softbank (9434.T) owns about 90% of the shares, closed at $63.59 on Thursday, almost 25% above its IPO price of $51.

Arm shares underperformed the Philadelphia Semiconductor Index (.SOX), which fell 0.7% on Tuesday as rising bond yields weighed on growth sectors such as technology.

Investors also watched grocery delivery service Instacart, another high-profile IPO, which rose at $36.91 in its first session, compared with its IPO price of $30.

On Tuesday, Redburn Atlantic, an equity research and trading firm, initiated coverage of ARM with a “Neutral” rating and a $50 price target, arguing that ARM’s recommendation at current valuations provides “greater conviction in multi-year earnings acceleration.” a” would require a weak (full year 2023) base.”

While bullish investors are pinning their hopes for the stock on demand tied to a surge in interest in artificial intelligence (AI), Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, Georgia, said he needed more evidence.

“People are a little sobered by the initial excitement,” said Morgan, whose company owns shares in Nvidia (NVDA.O) but has not invested in Arm.

“My biggest concern is valuation and the fact that everyone is buying ARM because it is a huge AI company in the eyes of investors. Although it benefits from AI, it is not Nvidia,” said the asset manager. “At this point, we have no direct evidence that ARM has been directly positively impacted by AI, as we had from Nvidia.”

Data from analytics firm Ortex on Tuesday suggests short sellers have started taking bets against Arm shares, with just over 5 million shares of the newly listed chip designer “borrowed,” representing 2.7% of the stock’s float.

Short sellers have to borrow a stock in order to sell it short, and the relationship between borrowed and shorted stocks is usually quite close, according to Ortex.

Initially, a new stock “is often missing a lot of data, so there is a reasonable expectation that the actual number is higher,” Ortex co-founder Peter Hillerberg said in an email.

Arm’s average cost of credit, which is the interest rate for borrowing, is currently 12.76%, according to Ortex. By comparison, the cost of borrowing for Tesla (TSLA.O), a stock with a similar percentage of shares sold short, is 0.48%, according to Ortex.

Arm’s higher borrowing costs “may be an indication that demand for borrowing and shorting the stock is high,” Hillerberg said.

Analysts at Bernstein and Needham had issued less optimistic comments about the chip technology company in recent days and options on the stock began trading at a brisk pace on Monday, with many investors bracing for further downside.

Late Monday, Arm said its underwriters exercised their over-allotment option in full and purchased an additional 7 million American depository shares (ADSs), bringing total IPO proceeds to about $5.2 billion.

Reporting by Lewis Krauskopf and Sinéad Carew; Edited by Chizu Nomiyama and Mark Potter

Our standards: The Thomson Reuters Trust Principles.

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