What's behind the 'once-in-a decade momentum' in Arm Holdings stock
Shares of Arm Holdings have been on a rollercoaster ride since reporting earnings last week , posting three moves of 19% or more within the last six trading sessions. What's driving these astounding moves is a confluence of factors including a scarcity in shares, sudden retail investor enthusiasm and a potential short squeeze. That's all on top of a strong quarterly print and an ongoing frenzy for AI. "That's just created this once-in-a-decade momentum," said Mehdi Hosseini, an equity research analyst covering the stock at Susquehanna International Group. The UK-based company, which designs and sells the instruction sets that allow customers like Apple , Nvidia and Advanced Micro Devices to develop chips, is up 64% since reporting results and nearly tripled since its public market debut in September. While the company posted robust results and guidance, analysts have cast doubt over the magnitude of recent stock moves, which include a 48% post-earnings rally and a 19% drop during Tuesday's session. The action's also driven up Arm's price-to-earnings ratio to 86 times on a next-twelve month basis, putting it at a premium to AI chip darling Nvidia. "The numbers did come up, fundamentals did seem a little bit stronger than people thought, but does that warrant doubling the stock price? Probably not," said Needham analyst Charles Shi. "There's a lot of other stuff that's not fundamentally driven going on here." ARM mountain 2024-02-08 Arm since reporting earnings One key factor at play is the limited number of shares in the marketplace. SoftBank , which took the company public last year , owns 90% of outstanding shares and is barred from selling those shares until its 180-day post-IPO lock-up period expires in March. That's stifled supply and driven up a higher bid for shares. While the share demand problem may seem short-term, Ryuta Makino, a research analyst at GAMCO Investors, said there's no guarantee that SoftBank even sells those shares next month. In fact, he suspects that SoftBank may hold on to stock in a similar fashion to what it previously did with Alibaba . SoftBank may retain a majority of its stake as a "strategic asset" and "poster child" for its AI portfolio, he added. Retail traders getting involved Arm seemingly came out of nowhere to become one of the most popularly traded names among retail investors in recent sessions. It ranked as the fifth most highly traded name across stocks and ETFs over a recent five-day period, behind Nvidia, Tesla and Advanced Micro Devices , according to data from Vanda Research. Options activity is also on the rise, and suggests heightened bullish sentiment, the firm said. Then comes the whole short-interest predicament. The number of shares being sold short in Arm is up 26% since the start of February, according to data from predictive analytics firm S3 Partners. Traders typically buy shares short as a bet that the price of an asset will fall. Hosseini suspects that the recent activity in Arm could be a product of a short squeeze akin to 2021's meme stock craze, when a slew of heavily shorted companies surged as retail traders piled into the stocks and forced short sellers to cover their losses. The move typically fuels a stock rally and can lead to other market participants buying shares due to a fear of missing out. The unwavering excitement around AI that's driven an investing frenzy over the last year may also be a factor at play with Arm. Needham's Shi noted that while the company isn't a "pure play" AI trade, and offers very limited exposure to the theme, investors have grouped it into that bucket given its ties to several technology leaders. "The narrative is in their favor because they keep talking about AI in their story," he added. "But I think this is a part of the mania."