Arm, the chip design giant, saw a surge in stock price, causing SoftBank to bleed, but another issue arises: how long can the upward trend last?
Currently, SoftBank holds 90% of Arm's shares, worth about $118 billion. According to the IPO terms, SoftBank can sell Arm's shares after March, but considering the limited circulation of Arm's shares in the market, there may be a massive sell-off leading to a drop in stock price.
The significant rise in Arm's stock price is partly due to its better-than-expected performance report and profit forecast. However, another crucial factor is that only 10% of its shares are circulating in the market, making the stock price highly sensitive, amplifying any trend and exacerbating short-selling risks.
This is also why, despite holding a large number of Arm shares, SoftBank's stock price increase is lower than expected—the market is concerned that the upward trend of Arm will exhaust before SoftBank's lock-up period in March.
Data from FactSet shows that Arm's current P/E ratio is 107 times, while the chip &#34;leader&#34; NVIDIA's P/E ratio is 59 times, much lower than Arm, indicating that Arm's stock price is significantly &#34;overvalued&#34;.
According to Breakingviews' calculation, to bring Arm's latest valuation to a level that meets analysts' assumption of a 45% operating profit margin, Arm must double its revenue in the current fiscal year.
Considering the unstable and hard-to-predict licensing revenue, as well as the slowing growth in the smartphone market that Arm heavily relies on, achieving the assumption of &#34;doubling revenue&#34; may be challenging.
Some media analysis suggests that SoftBank can consider two ways to &#34;solve the dilemma&#34;.
One is to use Arm shares as collateral, but the risk of this approach is that a deterioration in investor sentiment could lead to a drop in stock price.
Secondly, SoftBank can follow the method of selling Alibaba shares previously, using prepaid forward contracts to settle contracts with stocks or cash in a few years, avoiding direct market sell-offs.
Boosted by the AI craze, since its listing in September last year, Arm's stock price has doubled. Since announcing better-than-expected financial reports this month, the stock price has surged over 90% in three days, with a total increase of over 66% currently.
SoftBank's stock price has risen by 26% this year, with a 20% increase since Arm's latest financial report announcement.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b8901086-1695-4564-895e-982c9ee45e0f.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b8901086-1695-4564-895e-982c9ee45e0f.png"/>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/da65cc84-6970-4ee8-b61b-9866b9a640fb.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/da65cc84-6970-4ee8-b61b-9866b9a640fb.png"/>

SOBKY

9984

SFTBY

Due to the high premium and low liquidity, the market is concerned that the upward trend of Arm will soon be exhausted, posing a risk for SoftBank to cash out.

An issue with Arm: A PE ratio of 107 times! The major shareholder SoftBank, holding 90% of the shares, will be unlocked in March.