In recent days I have looked at why I believe ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) could be considered an underwhelming investment choice (the original article can be viewed here).
But, of course, the world of investing is never a black and white business — it take a variety of views to make a market, and the actual stock price is the only indisputable factor. With this in mind I have laid out the key factors which could, in fact, push ARM Holdings’ share price to the stars.
Modest mobile outlook offset by diversification
I have long stressed my concerns that market saturation in the high-growth area of smartphones and tablet PCs could prove calamitous for ARM Holdings’ royalties prospects, at least in the near-term.
However, Investec believes that while royalties from premium mobile phones are indeed due to slow, the impact of this structural shift is already
built into analyst estimates. City forecasters expect earnings to rise 16% in 2014 before accelerating 25% in 2015.
Added to this, Investec reckons that only 14% of ARM Holdings’ royalties should come from the top-end smartphone market by 2018 — down significantly from 29% at present — as the company diversifies into other tech markets. The broker expects around six-tenths of company royalties to come from non-mobile devices by 2018.
The broker notes that “based on licence deals to date, we see ARM becoming the standard across areas such as networking, digital TVs, servers and IoT [Internet of Things]. These are emerging areas for ARM and look set to drive significant royalty growth.”
Licences continue to shoot higher
Indeed, ARM Holdings’ entry into new markets has seen licensing activity shoot higher in recent times. The firm inked an impressive 26 processor licences during the fourth quarter alone, which the company said were for “a broad range of applications from smartphones and mobile computers to medical devices, wearables and the Internet of Things.”
Licensing revenues leapt 32% during September-December, to $127.4m, with ARM Holdings adding a gaggle of new customers to its existing heavyweight client base, which includes the likes of Apple, HTC and Samsung.
The business noted that demand for its computing, servers and networking applications continues to rise, with one licence agreed for its ARMv8 architecture and two for its Cortex-A50 Series processors during the period. Investec estimates that ARM Holdings’ market share in these three high-growth areas alone currently stands at around 5%, implying plenty of upside to be exploited.
