Is ARM Worth Reaching Out To?
By Chris Moore - January 16, 2012 | Tickers: ARMH, INTC | 0 Comments
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
ARM Holdings (NASDAQ: ARMH) has been the dominant player during the explosive growth of mobile computing and has its eyes on continued dominance. The company’s designs are featured prominently in the vast majority of mobile computing options, with other big firms, like Intel (NASDAQ: INTC), struggling to enter into the space.
At the recent Consumer Electronics Show in Las Vegas, Intel made its first serious effort in the mobile space, a chip named Medfield. The Medfield chip will be making its first appearance in consumer devices later this year, and is touted as being competitive with the current field of ARM based designs. ARMH CEO Warren East was not impressed and had this to say: “They have taken some designs that were never meant for mobile phones and they’ve literally wrenched those designs and put them into a power-performance space which is roughly good enough for mobile phone.”
Seems as though he feels confident in his company’s position, especially when coupled with his other statement about the new competition: “Are they [Intel] ever going to be leaders in power efficiency? No, of course not.” ARM does not sound worried, but should they be? The Medfield chip compares favorably with the current ARM chips available, but ARM’s next round of processors, including a quad-core offering, are expected to raise the bar significantly.
Which leads into the next question: if ARM continues to dominate the space, are they a good stock to capitalize on the expansion of mobile computing devices? The company is solidly positioned, with a standout business structure. ARM Holdings derives its revenue from licensing its designs and receiving royalties as each chip is fabricated. The company seeks to recover research costs with the licensing fee, thus leaving the majority of royalty payments as profit.
Because of their structure ARM Holdings has a very diverse client base, as was recently highlighted in a report from Nomura Equities Research. Surprisingly, Intel was their number one customer by revenue in 2010, accounting for roughly 7%. According to Nomura, approximately $44 million flowed to ARM Holdings from Intel. Other big names rounding out the top 15 customers were Samsung, Texas Instruments, NEC, Broadcom, AMD, Apple and Qualcomm. The company’s IP based structure also allows it to saturate the market and establish a self-supporting eco-system. This becomes a particularly strong position moving forward because the ARM chip set isn’t directly compatible with the x86 chip set that dominates PCs. Manufacturers would incur significant additional costs to switch to competitor chips, giving ARM a captive audience.
Another bright spot for ARM is Microsoft’s announcement that it will design Windows 8 to be both x86 and ARM compatible. Intel, on the other hand, can't be pleased as it derives almost 80% of its revenue from PCs. The impending opening of the PC platform is likely to further spur Intel's move into the mobile space, which may be a negative long-term for ARM.
As it stands, ARM is currently in a strong position, with a very profitable near future, but what about the stock? Are the shares an attractive investment? Currently the stock is trading at a lofty PE of 71.63. As mentioned the underlying company is strong, but I’m not willing to invest just yet. ARM is a well-run company, with a very impressive line of products and clients, but price is part of the investing equation, and currently it is a bit too steep. ARM Holdings is what I consider the classic example of a good company at a bad price, so it shall remain on my watch list for the time being. For comparison, Intel is currently trading at a PE of 10.86, pursuing the high growth of mobile, and even has a current dividend yield of 3.34%. I consider Intel a better-priced play on the mobile semiconductor space.
The Motley Fool owns shares of Intel. TigerAnalyst owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Interesting. A very strong start for intel in the mobile market. Discuss.
The single-core, 32nm processor, which is now called the Atom Z2460, is clocked at 1.6GHz and supports hyper-threading. That processor is then bundled with the Imagination Technologies PowerVR SGX540 graphics and Intel's 6450+ modem inside the reference design.
From fool.com:
Interesting. A very strong start for intel in the mobile market. Discuss.
Thinking about coming a mod to simply not moderate.
Thinking about coming a mod to simply not moderate.
i5 6600k 4.6ghz / MSI 280X / 8Gb 2666 DDR4 / Gigabyte Z170X-UD5 / TX550M / 500Gb 850 EVO / NZXT S340 / Corsair K65 / Corsair M60
They have been late to the party for a while, this is simply their introduction into the mobile CPU market.
Thinking about coming a mod to simply not moderate.