An issue with Arm: A PE ratio of 107 times! The major shareholder SoftBank, holding 90% of the shares, will be unlocked in March.

Arm, the chip design giant, saw a surge in stock price, causing SoftBank to bleed, but another issue arises: how long can the upward trend last?

Currently, SoftBank holds 90% of Arm's shares, worth about $118 billion. According to the IPO terms, SoftBank can sell Arm's shares after March, but considering the limited circulation of Arm's shares in the market, there may be a massive sell-off leading to a drop in stock price.

The significant rise in Arm's stock price is partly due to its better-than-expected performance report and profit forecast. However, another crucial factor is that only 10% of its shares are circulating in the market, making the stock price highly sensitive, amplifying any trend and exacerbating short-selling risks.

This is also why, despite holding a large number of Arm shares, SoftBank's stock price increase is lower than expected—the market is concerned that the upward trend of Arm will exhaust before SoftBank's lock-up period in March.

Data from FactSet shows that Arm's current P/E ratio is 107 times, while the chip "leader" NVIDIA's P/E ratio is 59 times, much lower than Arm, indicating that Arm's stock price is significantly "overvalued".

According to Breakingviews' calculation, to bring Arm's latest valuation to a level that meets analysts' assumption of a 45% operating profit margin, Arm must double its revenue in the current fiscal year.

Considering the unstable and hard-to-predict licensing revenue, as well as the slowing growth in the smartphone market that Arm heavily relies on, achieving the assumption of "doubling revenue" may be challenging.

Some media analysis suggests that SoftBank can consider two ways to "solve the dilemma".

One is to use Arm shares as collateral, but the risk of this approach is that a deterioration in investor sentiment could lead to a drop in stock price.

Secondly, SoftBank can follow the method of selling Alibaba shares previously, using prepaid forward contracts to settle contracts with stocks or cash in a few years, avoiding direct market sell-offs.

Boosted by the AI craze, since its listing in September last year, Arm's stock price has doubled. Since announcing better-than-expected financial reports this month, the stock price has surged over 90% in three days, with a total increase of over 66% currently.

SoftBank's stock price has risen by 26% this year, with a 20% increase since Arm's latest financial report announcement.