One of the standouts of today's morning trading session was Arm, which logged a 3.0% performance and outperformed the S&P 500 by 2.0%. The Semiconductors stock is now trading at $117.42 per share and may still have upside potential because it is still -20.68% under its average target price of $148.04. Analysts have set target prices ranging from $73.0 to $203.0 dollars per share, and have given the stock an average rating of buy.
For the greater market's outlook on the stock, we can use Arm's short interest as a proxy. The short interest represents the proportion of the float's shares that are tied to short positions, meaning that the investor believes the stock will decline in the future. Here, the stock's short interest is 12.6% which means the outlook is split.
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 measure of the market sentiment regarding a stock is its rate of institutional ownership, which in the case of Arm stands at 7.2%. This indicates a lower than average rate of institutional ownership -- but what does that have to do with sentiment regarding the stock?
The reason we look at institutional ownership is that institutions such as hedge funds, pension funds, and mutual funds have vast research capabilities. They are often close to management, speaking to them one-on-one and gaining an understanding of the opportunities and challenges they face. Thus, if an institution is willing to place their capital in a company, it's likely that their due diligence has shown it is a safe bet.
Overall, there is mixed market sentiment on Arm because its an analyst consensus of strong upside potential, 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 | 139,000 | 145,000 | -6,000 | -101.75 |
| 2022 | 423,000 | 81,000 | 342,000 | 64.42 |
| 2021 | 256,000 | 48,000 | 208,000 |
