ARM Holdings, long the power player among chip designers for
smartphones and tablets, has curbed investor concerns of waning
potential and is poised for a strong 2014, analysts say.
They see several possible growth drivers forARM Holdings (
), as customers such asApple (
) and Samsung roll out new products. There's also word thatGoogle
) might design its own server processors using ARM Holdings
technology, according to a
Bloomberg News report
"I think ARM is in a phenomenal position headed into next
year," said Evercore Partners analyst Patrick Wang. "It is firing
on all cylinders."
ARM Holdings is the second-largest firm by market cap in IBD's
Electronics-Semiconductor Fabless industry group, afterQualcomm (
), and beforeBroadcom (
),Avago Technologies (AVGO) andXilinx (XLNX).
Wang noted that ARM Holdings' stock rode a roller coaster over
the past couple of years, dipping below 23 per share in mid-2012
and seesawing the middle of this year before recovering in the
fall to approach 50 in October. It now trades just shy of
For the downs, Wang and others have most recently blamed
headlines generated by would-be competitorIntel (INTC), which has
made known that it wants to carve out a big share of the
smartphone and tablet market. This, the thinking went, would come
at ARM Holdings' expense.
Rivals And Alliances
Intel, the world's largest semiconductor company, has
dominated the arena of chipmaking for conventional personal
computers, but ARM, which counts Intel competitor Qualcomm among
its partners, has virtually shut Intel out of the smartphone and
tablet space. Yet Intel, at its investor day in November, touted
expectations that sales of Intel-based tablet computers will
surge past 40 million next year, a jump of more than 300%, with
smartphone growth to follow.
"I never want to discount Intel," Wang said. "Intel has deep
pockets and they really want a piece of this market."
But, he added, Intel executives also said they would consider
making microprocessors based on competitors' designs, presumably
including ARM Holdings, And since the latter earns royalties on
its chip designs, the Intel concession "would seem to balance
things out" for ARM Holdings.
With the Intel head wind seemingly diffused for now, Wang
said, ARM Holdings is now "my top large-cap pick for next
Other Wall Street analysts have been upbeat too, issuing
outperform and buy ratings.
An easing of Intel pressure is hardly all that puts wind into
ARM Holdings' sails.
The Cambridge, England-based company designs the chips that go
into iPhones, iPads and a plethora of other smartphones, tablets
and other mobile devices. It earns royalties on every ARM-powered
device shipped -- accounting for about half its revenue -- and
collects licensing fees for products in development that use its
Despite a 2% year-over-year decline for the semiconductor
industry in the third quarter, processor royalty revenue rose
about 14% for ARM Holdings, according to the company. That missed
estimates, but its licensing income swelled nearly 50%, beating
expectations. And earnings per share rose 39% on 28% higher
revenue, with both beating consensus views.
Analysts have expressed concerns about the saturation of
high-end smartphones. There are fewer royalties to be had if most
people in the market for such a device already have one and sales
slow. But many analysts think this could be offset by greater
volumes of mid-tier smartphones being sold in high-growth markets
such as China and India.
Equally important, on the high-end front, was the move made
this year by Apple to shift from the standard 32-bit chips to
64-bit chips in its iPhone 5S.
Wang said the change was "huge" for two reasons. One, Apple is
a major ARM Holdings customer, and two, others will follow
Samsung already has said it will follow suit in 2014. And ARM
Holdings generates higher levels of royalties on the faster 64s,
making each shipment more profitable.
"If not for Apple, others would have taken their sweet time
getting to it, but now it becomes essential. And that's a nice
tail wind for ARM heading into next year," Wang said. "I think
ARM really got its mojo back with the Apple move, because ARM is
only as good as its customers."
William Blair & Co. analyst Anil Doradla agreed. "I like
the story; I like the fundamentals," he said in an interview.
Doradla has a "market perform" rating on ARM Holdings
"strictly on valuation," meaning he is not yet convinced that
there is room for substantial advancement for the stock. He said
the 64-bit chip development could help drive growth, and
expansion of the mid-tier smartphone market in developing
countries should provide another boost.
"That market is going to be very positive," he said. But he
thinks the stock may need another "upside surprise" to advance
Wang said Apple may be the one to deliver such a catalyst.
Looming from Apple in 2014 is a larger, roughly 12-inch iPad,
expected to have a keyboard and other features associated with
notebooks and personal computers. It could change the world of
business travel, Wang said, and potentially "change the PC
landscape." That could boost business for ARM Holdings as
"I think that if and when it comes out -- and all signs
indicate it in fact will come out -- that's the next leg of
growth for ARM's stock," he said.
In the latest news out of the company, ARM Holdings on Friday
said it acquired graphics lighting company Geomerics, and that
its technology could accelerate the transition to photorealistic
games in mobile.
ARM Holdings CEO Simon Segars said on the firm's third-quarter
earnings conference call that it is increasingly licensing its
chip designs to more companies, and that some of these firms are
plowing into cutting-edge areas such as fingerprint recognition
and wearable computing, providing new growth opportunities.
"A record 48 processor licenses were signed in the (third)
quarter with 24 companies," Segars said. That included 11 firms
with their first-ever ARM license, "many of whom are planning to
take our technology into new and emerging markets."
Looking toward the fourth-quarter's results, he said, a
"record order backlog" and "robust opportunity pipeline" point to
a strong quarter for licensing revenue, with a sequential rise in
ARM's royalty revenue.
Analysts polled by Thomson Reuters on average forecast EPS at
26 cents for the fourth quarter and 98 cents for 2013, then $1.24