Smartphone Configuration for Social Media Marketing in Frederick MD (Photo credit: Frederick Md Publicity)
ARMH : NASDAQ : US$38.33
ARM : LSE
BUY
Target: US$52.00
COMPANY DESCRIPTION:
ARM is a leading semiconductor IP supplier to the diverse global semiconductor market. ARM’s revenues are driven through a licensing and royalty business model, with a majority of the royalty sales driven by the mobile market including handsets, smartphones, and tablets. ARM also supplies semiconductor IP to the server, PC, and embedded markets and physical implementation libraries and IP to semiconductor foundries
Investment recommendation:
Despite the announcement of a much improved low-power application processor roadmap from Intel at Computex, we maintain our belief ARM is well positioned to maintain dominant market share of the growing smartphone and tablet markets, and Q2/13 results tracked well against our above-consensus estimates. While we believe accelerating emerging market feature phone to smartphone upgrades should drive both royalty TAM growth and rate expansion for ARM, we are slightly lowering our forward royalty estimates as our global handset survey work indicates weaker high-tier smartphone growth.
We believe a higher integrated chipset mix and Mali graphics attach rate in lower-tier smartphones should mute this impact to ARM’s royalty sales; therefore, our estimates remain above consensus. We reiterate our BUY rating, but lower our PT to $52.
Investment highlights
Our global handset surveys indicate the smartphone innovation curve has slowed, resulting in weaker high-tier smartphone sales growth. In fact, we believe Samsung has already lowered pricing and increased retail incentives for the Galaxy S4 and Apple has lowered iPhone 5 pricing in many markets as high-tier demand has disappointed.
Despite lower high-tier smartphone estimates, our near-term sales and earnings estimates remain above consensus as our surveys and
recent ARM partner results indicate accelerating emerging market smartphone growth. Due to the growth of multi-core integrated chipsets and higher Mali attach rates in these markets, we believe this trend should drive strong royalty sales growth.
While our 2013 earnings/ADS estimate remains unchanged at $1.02, we are lowering our 2014 estimate from $1.34 to $1.31.
Valuation:
Our $52 price target is based on shares trading at roughly 40x our 2014 normalized earnings/ADS estimate.
