During today's morning trading session, Arm took the market by storm, rocketing to $179.56 per share despite it now being above its mean target price of $145.78. This 15.7% movement implies there may not be much more room for upwards movement for the stock -- if its analysts are to be believed. They are giving the Semiconductors stock on average rating of buy, with target prices ranging from 66.0 to 200.0 dollars per share.
We can use Arm's short interest as a proxy for determining general market sentiment regarding the stock. The short interest is the percentage of the share float that represents short positions, meaning that the investor believes the stock will decline in the future. Since ARM's short interest is 10.2%, the market sentiment is mixed on this stock.
Short selling involves borrowing shares and then selling them at current market prices. In the successful version of the strategy, the shares are purchased at a lower price at some time in the future. The investor then returns the shares to the lender, and keeps the profit made on the sell/buy transaction.
One way to tell how the market is perceiving a stock is to look to its rate of institutional ownership. With their vast resources, hedge funds, pension funds, and wealth managers are able to perform due diligence to a level that most investors cannot. So it follows that their investment decisions may be more educated. But we also know that bankers and portfolio managers can make mistakes too.
So the fact that Arm has a low rate of institutional ownership at 6.4% is not an immediate red flag. It just means that something about the company has kept institutional investors from committing -- or the stock is simply flying under their radar.
Overall, there is mixed market sentiment on Arm because its an analyst belief that shares are overpriced, a buy rating, an above average percentage of its shares sold short, and a very small number of institutional investors. Warren Buffett famously said that in the short term, markets are voting mechanisms, but in the long term, they are weighing mechanisms. This means that long term investors should be aware of a stock's fundamentals before committing.
Buffett was one of the fist investors to focus on free cash flow as a yardstick for a company's health. Here are ARM's recent cash flows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | -290,000 | 29,000 | -319,000 | -193.27 |
| 2022 | 423,000 | 81,000 | 342,000 | 64.42 |
| 2021 | 256,000 | 48,000 | 208,000 |
