Shares of Arm Holdings (NASDAQ: ARM) were among several AI stocks that were pulling back as momentum in the high-flying sector fades following a blistering rally so far this year. Arm also faces a key test tomorrow as its post-IPO lockup period will expire, meaning that insiders will be able to sell Arm shares that had previously been off-limits.
As of 11:25 a.m. ET, the stock was down 2.7%.
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Arm investors prepare for a big move
Concerns about a potential bubble in AI stocks are beginning to sweep the market, and high-priced stocks in the sector are cooling off as gains in stocks like Nvidia last Friday abruptly reversed, a sign the market believes the rally deserves a pause.
As for Arm, investors are likely anticipating the end of the lockup period tomorrow. Often, stocks fall when a lockup period ends as a result of insider selling.
Arm has made big gains since its IPO in September, up roughly 150% since its debut as the stock skyrocketed on its earnings report last month. Those gains may have also been fueled by a limited float of around 100 million shares.
However, Arm's lockup is a bit unusual as roughly 90% of the company is owned by Softbank, the prolific Japanese investment firm led by Masayoshi Son. Whether the stock moves tomorrow will depend on Softbank's action. Additionally, Arm employees will be able to sell about 11 million shares that were previously restricted.
What's next for Arm
Beyond tomorrow's lockup expiration, the future still looks bright for Arm. The company has a strong position in generative AI as it licenses its CPU architecture to chip companies like Nvidia, and collects royalties as those products are sold. Its architecture is also renown for consuming relatively little power, which is why Arm's designs are in 99% of the world's smartphones. That low-power advantage makes it valuable in generative AI applications as well.
Arm shares are expensive at roughly 100 times forward P/E, but the stock has a promising growth path ahead of it.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
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