Uncovering a buried treasure – ARM Holdings
ARM Holdings is the world’s leading semiconductor intellectual property (IP) company by revenue. The company is headquartered in Cambridge, UK. ARM’s main activity is the design and licensing of IP for low-power RISC microprocessors. Its key customers include Apple, Qualcomm, and Samsung. ARM cores are the de-facto standard for mobile application processors (smartphones and tablets) and are expanding into a range of new areas including microcontrollers, networking, and servers. Its direct licensing competitor is Imagination Technology, and indirectly, it competes with Intel.
Investment case
In the coming year, the key driver for ARM’s business will be royalty growth, the smartphone unit accounts for about 50% of royalty revenues. Other elements which drive its business revenue are:
- OpEx: it’s operating expenditure is directly linked to license growth.
- Migration to 64-bit smartphones: In 2014 only 13% of smartphones were equipped with a 64-bit chip, we expect that in 2015 about 50% of smartphones will be.
- Networking: the networking opportunity represents a market opportunity similar to the smartphone opportunity. By 2018, the networking market could represent a total turnover of about USD 20bn, and ARM could capture about 30% of these future flows.
- Valuation: The present valuation is at a 12 month forward P/E of 32, this corresponds with a 2011 inventory correction ditch.
- Broad-based industry adaptation of 64-bit processors should provide ARM with a strong revenue base for the years ahead.
- ARM has a highly attractive risk reward ratio (Sharpe FY01 is 4.26).
Revenue/business triggers
- The launch of a new 64-bit processor for Android-based smartphones,
- Design wins by networking partners such as AMCC, Cavium Broadcom, Hisilicon, AMD, Xillinx, and Altera,
- Higher annual growth rates: at present it is currently assumed that the company will grow at a conservative level of 15 % through to 2018,