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manya saini: SoftBank’s chip designer Arm extends gains after $65 bln Nasdaq debut

Shares of SoftBank‘s Arm Holdings rose in volatile early trading on Friday, extending gains from a stellar Nasdaq debut that valued the British chip designer at $65 billion and lifted hopes of an end to the drought in U.S. listings.

The stock gave back most of its premarket gains after closing 25% above its offer price of $51 on Thursday. It was last up 29.2% from the IPO price at $65.89.

“The huge enthusiasm around trading suggests there is very much still appetite for high-growth names, and there’s growing hope that the IPO market will now become more buoyant next year,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

Analysts expect more trading volatility for the Arm stock if it draws more interest from AI-focused retail investors and also due to a limited number of publicly traded shares as SoftBank continues to own about 90% stake.

Arm told potential investors in New York when it began marketing the IPO that the cloud computing market could be an area of growth for it. Financials disclosed ahead of the IPO showed that Arm’s full-year sales had fallen marginally.

It currently has just a 10% share in the segment that was expected to grow at an annual rate of 17% through 2025, mainly due to the advances in AI.

“Arm generates very high margin revenue, but much of that is put back into research and development,” said Michael Ashley Schulman, partner and CIO at Running Point Capital Advisors. Analysts have said Arm can potentially ride on the coattails of Nvidia, which has been the biggest beneficiary of the AI boom, as its chips would need energy-efficient central processing units (CPUs) – a speciality of Arm.

As of Thursday’s close, Arm has a price-to-earnings ratio based on the last 12 months of 163, compared to 110 for Nvidia, LSEG data showed.

Despite investor enthusiasm for the storied chip designer, some on Wall Street urged caution.

“ARM’s jaw dropping valuation for what we see as a mid-single digit percentage growth company is alarming,” said Angelo Zino, senior equity analyst at CFRA Research, even though it has recurring sources of revenue and leading gross margins.

Brokerage Needham started coverage on the stock with a ‘hold’ rating and said it awaits a better entry point.

“Arm can grow by capturing greater value from smartphones, but not enough to support upside from the stock’s IPO valuation,” it said

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