Stock of the Week
ARM Holdings
Contrarian Investment
The results of ARM Holdings (ARM) always make uplifting reading with growing end markets driving revenue and profits higher. In 2011 revenue was up by a fifth while earnings per share rose by a third. The divers for ARM remain robust as Smartphone and tablet growth continues unabated.
ARM has continued to hold its own, with full-year results having showed that things are full steam ahead and the success of the iPad 3 and the iPhone 4S has bolstered sentiment.
At the Consumer Electronics Show in January Intel showed off its Medfield chip which will be in Android smartphones made by Motorola and Lenovo. Intel claims that the chips have good battery life to power consumption ratios. However, some of the barriers which remain for Intel are that some applications are designed specifically to run on ARM powered chips.
Whether Intel will be successful or not this time remains to be seen with it being notable that a previous attempt in 2010 failed. ARM and Intel have very different business models and with ARM designed chips performing well it is not clear why firms would switch to Intel – the threat nevertheless remains.
Meanwhile Windows 8 was launched as a consumer preview version at the end of February and should launch commercially before the end of the year. The platform has been designed to be compatible with ARM chips as well as Intel chips. Microsoft is keen to put its operating system onto ARM chips to boost its ability to compete in the tablet space. Whether ARM chips will be pushed aggressively on laptops and desktops isn’t clear as in doing so there could be compatibility problems with some third-party software.
The best case scenario is that Microsoft pushes ARM-powered Windows 8 on laptops as a way to increase battery life and the ARM standard becomes the norm. However, with users rating compatibility over longer battery lives, on laptops at least, such a scenario may be unlikely.
The general backdrop though has been favourable to ARM as its two key markets perform well. Smartphones and tablets have continued to see robust growth with Apple Inc launching updated products in both categories in Q4 and Q1 respectively.
Assessing these markets ARM estimates it has more than a 90% share of smartphone processor chips while this market is set to grow by 19% a year to 2016. This means the number of chips in smartphones produced per year will grow from 1,900 million in 2011 to 4,500 million in 2016.
There is no doubt that ARM is riding the crest of a wave on the desire of low-powered processors in which is specialises. This is as mobile computing is driven by smartphones, tablets and laptopts/netbooks. Indeed tablets only became commercially possible in a big way as battery life could be boosted to eight hours or more.
At present, though, ARM is driven by smartphones and tablets with higher powered devices requiring more of its technology and therefore boosting revenue.
ARM notes that in Q4 industry shipment growth was flat year-on-year underpinning ARM’s previous caution on the quarter. However, the group itself saw a 26% increase in shipments allowing it to outperform the market by a significant margin. As such Q4 boosted operating margins to 48% while for 2011 as a whole they came in at 45%. Looking at 2011 as a whole and USD revenue growth was 24% which compares to 8% for the industry.
Overall, with ARM’s market presence, the smartphone market is set to grow by around 230% over the next five years so strong growth for the chip designed is a given.
This report was produced by Senior Research Analyst, Andrew Latto.
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