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Here’s why tomorrow could be the worst day for ARM stock

Here’s why tomorrow could be the worst day for ARM stock
Elmaz Sabovic

The semiconductor industry has seen significant expansion following the rise of artificial intelligence, setting the tone for its trajectory in the coming years. This growth has created opportunities for new players to enter the market, such as Arms Holdings (NASDAQ: ARM), whose value has surged by 116% since its IPO.

Arm Holding’s recent earnings report exceeded expectations, with projected revenue for the March quarter between $850 million and $900 million, surpassing analysts’ forecasts of $778 million. Moreover, the company expects adjusted earnings per share to be approximately 30 cents, higher than Wall Street’s estimate of 21 cents. Arm Holdings revised its sales forecast for fiscal 2024 to a range of $3.16 billion to $3.21 billion.

ARM revenue guidance for Q4 and 2024. Source: Arm Holdings
ARM revenue guidance for Q4 and 2024. Source: Arm Holdings

Despite these substantial guidance numbers, tomorrow, March 12, might prove the worst day for ARM stock since its IPO, as its lock-up by Softbank (OTCMKTS: SFTBY) expires.

RISC-V might prove to be a real competitor to Arm

RISC-V is a project that develops architecture and associated technologies that directly compete with ARM. One significant distinction between the two lies in accessibility; RISC-V is open-source and available free of charge. 

Interestingly, several prominent ARM customers such as Alphabet (NASDAQ: GOOGL), Nvidia (NASDAQ: NVDA), and Qualcomm (NASDAQ: QCOM) also support RISC-V despite being major consumers of ARM technology. 

These customers seem to be using ARM until RISC-V is fully ready and might opt for the cheaper alternative.

Cooperation with Softbank could be harmful to ARM stock

Looking at the IPO prospectus raises significant concerns, which were highlighted in the X post from stock researcher JustDario.

It highlights that Arm Holdings has already identified material weaknesses in its internal control over financial reporting and may identify material weaknesses in the future.

Moreover, ARM discloses a troubling statement indicating that Softbank may influence Arm Holdings to take actions that ARM shareholders may not perceive as beneficial. These actions could potentially favor Softbank’s interests at the expense of ARM’s stock value.

ARM goes on to caution about potential financial irregularities from Softbank and their potential impact on Arm Holdings’ inflated value. ARM explicitly mentions the risks associated with Softbank being margin-called on its $9 billion borrowing collateralized by 75% of ARM stock. 

In such a scenario, there is a risk of these shares being swiftly offloaded in the open market, which could be catastrophic considering ARM’s limited 10% float listed.

This means that from March 12, after the IPO lock-up expiration, Softbank is free to sell all of its holdings in the stock market, potentially negatively influencing the ARM stock.

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