ARM shares steady on firm grip of smartphone market

Still punchy

The market predicted trouble for ARM’s earnings after major customer Apple posted one of its most disappointing quarters on record.

But the UK chip designer confounded fears on Wednesday, with a 17% rise in fourth-quarter profit.

Judging by the stock price reaction to the chip designer’s earnings though, investors still wanted their pound of flesh, sending the stock as much as 5.6% lower.

The slide took ARM shares’ fall over a fortnight to about 15%.

Investors evidently continued to query the valuation of the Cambridge-based firm whose intellectual property is at the heart of 90% of smartphones.

That’s despite processor revenues surging 24% quarter-on-quarter in stark contrast to the 3% revenue drop on average in the chip industry.

Another source of investor concern, potential revenue slack as ARM’s installed base transitions to its latest designs, was also pushed back.

ARM’s latest chip architecture passed the 50% milestone in its last fiscal year, it said.

Pre-tax profit was £138.7m, and revenue, which ARM books in dollars, up 14% to $407.9m—both beat the street.

But all that was still not enough to reassure investors wrestling with ARM’s valuation.

So long as ARM maintains its own long-term growth assumptions, many shareholders may have little choice to take the group at its word.

Even with a market value down 18% since December, ARM’s 5%-10% sales consolidated annual growth rate forecast for 2015-2020 suggests the shares could cheapen further.

Above-guidance City forecasts of about 12.64% by in 2017, would be slashed back below guidance by sales cost expectations of 11%.

Mali rising

The problematic element remains ARM’s own long-term expectations.

Its forecasts above are modest, despite the outlook for chip markets in which it is not dominant.

Yet we know ARM has been taking market share in Graphical Processing Units (GPUs) from market leader Imagination Technologies for a couple of years.

Getting an accurate handle on this market isn’t easy as the biggest players, including Intel and Qualcomm, play cards close to their chests.

However data from public sources suggests shipments licensed by ARM and smaller US rival Vivante rose more than 80% in 2013.

And in 2015 ARM’s latest processors to come to market were two ‘Mali’ GPUs.

It may be significant that global smartphone maker No.2, Samsung, last year chose a ‘six-core’ Mali T628 and a hybrid ‘system on chips’ design based on ARM’s Exynos IP.

If the global GPU space may be worth as much as $128bn by 2020, as current data suggests, ARM’s installed mobile GPU base of just a 1/3, holds opportunities.

That’s before considering ‘dumb phones’ and servers.

ARM has only negligible share in server CPUs and handsets more politely termed ‘feature phones’.

ARM HOLDINGS REVENUE SEGMENTS 2015

“China is an issue”, but…

ARM later on Wednesday hinted it was looking beyond its established customer base.

Its CFO Chris Kennedy said he expected ARM’s new V8 architecture to “end up in every phone, even down in the low end.”

“We expect chips based on our latest version 8 technology will continue to replace older ARM technology in mobile markets, and gain share in networking infrastructure and servers,” Kennedy said.

“Clearly China is an issue for businesses globally,” Kennedy added.

“For ARM, given our diversification, it’s something we focus on but it’s not something we are overly worried about.”

The group, despite Apple/China, is still “broadly” guiding towards 2016 sales of $1.64bn.

Given ARM’s history of revenue beats, ruling out more upside surprises looks problematic.

Fade the short circuit?

That may not help ARM’s valuation or shares in the near-term.

From a technical perspective all-time highs above 1200p last summer were an overshoot that now represents a long-term challenge.

Still company reassurance has re-established c. 918p neckline support.

That is well above an undemanding rising trend from 2012 and last year’s low, though 38.2%/1012p fib extension off that low is also a problem.

Nearby moving average convergence (yellow, green, blue: 50, 100, and 200-day) underlines the probable medium-term cap.

Progress back to December’s peak could be slow ahead of ARM’s Q1 release in April.

Even so, the worst case does not look a great deal lower, if ARM stares-out the naysayers.

Any sign that internal forecasts are being powered down would of course negate my cautious optimism.

DAILY CHART

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