Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
ARM Holdings: The 64-bit chip could take over
For years ARM Holdings (ARMH) has been supplying some of the world’s largest companies with microprocessors and related technological software. Its client list includes market movers like Intel (INTC), Samsung (SSNLF), Qualcomm (QCOM), and Fujitsu. Indeed, from microcontrollers to graphics technology, the Cambridge, England-based company has been a prominent original equipment manufacturer (OEM) in the technology industry for years.
This success has given ARM a stranglehold on the market. In fact, it would not be an exaggeration to state that most consumers that possess a smartphone, tablet computer, or digital television, are using ARM technology on a regular basis. But if that is the case, and the market is so saturated with these products, investors may question where a company of this sort can find opportunities for growth.
The potential answer to that question is actually a product that is already on the market. Apple Inc. (AAPL), one of ARM’s most lucrative contracts, recently took to the streets with its new iPhone product and iPad Air tablet. These products have a laundry list of new features, but it is what’s inside that ARM investors are interested in. The items contain a 64-bit chip that is set to take over the smartphone and mobile computing industry.
Until now the industry had, at large, been using 32-bit chips, a satisfactory line that has serviced the needs of consumers for years. Though, with growing demand for greater speed and energy efficiency, Apple has become the first developer to make the decision to graduate to a stronger and faster 64-bit chip. Royalties from ARM’s chip designs made up over 50% of its top line during the 2012 term, and the company has already seen a boost as a result of the iPhone 5S’ release.
The significance behind the adoption of the 64-bit chip, however, is the fact that ARM actually earns a higher royalty fee from its sale than it had with the 32-bit chip. In the third quarter, royalty fees from its processor division expanded 48% over the prior-year figure, to about $123 million. This far exceeded the estimates of analysts on the street and, consequently boosted the stock price.
Still, Apple’s latest offerings only represents the first generation of devices to incorporate the use of the chip. Once its place in the market is solidified, it will drive ARM Holdings’ top line, but has the potential to revolutionize mobile processing and data transfer. After all, ARM is also under contract with Samsung, one of Apple’s prime opponents in the mobile space, and a company that will more than likely follow in Apple’s footsteps to provide its customers with the best processing chips its supplier has to offer.
Certainly an efficient market would leave this product’s potential revenues baked into the company’s stock price. However, ARM Holdings has been trading at a P/E level in excess of its industry peers for a long time now. What’s more, given such a small sample size of revenues, based off the sale of so few products, it is difficult to accurately project a long-term target price for the stock. Therefore, investors may wish to monitor the progress of the 64-bit chip as it continues to penetrate the market before taking a position here. Still, current statistical data is exciting, and the opportunity to back a superior product as it attempts to take over a very lucrative industry is likely to tantalize even the most conservative of investors.
For a more detailed evaluation of ARM Holdings’ business prospects, as well as our take on the investment merits of the stock, subscribers are encouraged to check out our full page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.