Is ARM Too Pricey, Weak to Take on Intel?
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ARM Holdings plc (Nasdaq: ARMH) shares are showing some weakness today, possibly stemming from two events: 1) Intel's (Nasdaq: INTC) record quarter and solid outlook for FY11, and 2) an article in the WSJ citing a call by J.P. Morgan that says ARM may not have much to gain.
Firstly, the J.P. Morgan analyst says that, even if NVIDIA (Nasdaq:
NVDA) and ARM steal a large chunk from Intel's market share in supply PC chips, the amount would almost be marginal. Say, by 2014, ARM manages to slip their chip into one-third of the 150 million PCs that are expected to ship that year. The chips cost $20, and ARM will double it's royalty rate to 2% per chip. Doing the math, that would add about $60 in additional profits for a company that has a market cap north of $11 billion.
The analyst continues that such estimates are, if anything, aggressive.
Stealing 33% of chip market share from a world leader in the business is an arduous task by many measures. Should manufacturers adopt ARM chips, they would have to spend to redesign products that are currently tuned to Intel's product offerings. JPM analyst notes that the move isn't likely unless ARM chips are relatively cheap. Intel is already slinging low-priced, energy-efficient chips to the PC market.
The J.P. Morgan analyst concedes that the growth in ARM is impressive, and, excluding PC units, ARM-based chips will increase from 4.4 billion in 20096 to 10.5 billion in 2014. He notes that that adds just $0.53 to EPS in 2014. Adding an additional $0.15 for PC chip sales, and ARM trades at 40x FY14 EPS estimates.
He notes that, at this valuation, investors should keep the shares "at arm's length."
Moving on, Intel had a solid fourth quarter 2010, producing record earnings in the process. INTC had EPS of $0.59 on revs of $11.5 billion, setting the company up for a record year. Q111 sales are expected to be $11.5 billion (+/- $400 million), ahead of the Street consensus of $10.71 billion.
Recently, Intel has been shaken by announcements that Microsoft (Nasdaq:
MSFT) will become less exclusive with AMD (NYSE: AMD) and Intel with Windows, opening it up to ARM-based chips.
On their conference call, Intel CEO Peter Otellini said, "Many of you have asked us questions about how we will compete with ARM in the new segments of mobile computing. Our answer is very simple. As we have done for decades in the traditional computing markets, we will apply the world's most advanced silicon transistor technology to these new segments to deliver the lowest power, highest performance, lowest cost products on the planet. When these chips are combined with our support for the world's leading mobile operating systems, our proven ability to create broad ecosystem support and our growing software capabilities, I'm confident we will be very successful in these segments. These investments are the strongest possible statement of our confidence in our business model and our growth opportunities. And will extend our technology advantage even further."
Also, answering a question about Microsoft's announcement last week, Otellini said, "I guess I view it as being not a lot of new news and I can see positives and negatives for Intel in this announcement. Historically, Microsoft has only supported ARM on - in their phone OS and in their consumer electronics OS. So they've had ARM support for some time. In fact, in big Windows they've had support for, gosh, Alpha, PowerPC, MIPS, and at one point ARM on the Vista program that they dropped. So this is nothing really new from that perspective."
Continuing, "On the downside, there is the potential - given that Office runs on these products, for - there's some creep-up coming into let's say PC space. I am skeptical of that for two reasons. One, that space has a different set of power and performance requirements where Intel is exceptionally good. And secondly, users of those machines expect legacy support in terms of software and peripherals that has to all be enabled from scratch for those devices."
Shares of ARM Holdings are down 5.6% today, though they are up 30.5% for the month of January, mostly following the Microsoft announcement.
Firstly, the J.P. Morgan analyst says that, even if NVIDIA (Nasdaq:
NVDA) and ARM steal a large chunk from Intel's market share in supply PC chips, the amount would almost be marginal. Say, by 2014, ARM manages to slip their chip into one-third of the 150 million PCs that are expected to ship that year. The chips cost $20, and ARM will double it's royalty rate to 2% per chip. Doing the math, that would add about $60 in additional profits for a company that has a market cap north of $11 billion.
The analyst continues that such estimates are, if anything, aggressive.
Stealing 33% of chip market share from a world leader in the business is an arduous task by many measures. Should manufacturers adopt ARM chips, they would have to spend to redesign products that are currently tuned to Intel's product offerings. JPM analyst notes that the move isn't likely unless ARM chips are relatively cheap. Intel is already slinging low-priced, energy-efficient chips to the PC market.
The J.P. Morgan analyst concedes that the growth in ARM is impressive, and, excluding PC units, ARM-based chips will increase from 4.4 billion in 20096 to 10.5 billion in 2014. He notes that that adds just $0.53 to EPS in 2014. Adding an additional $0.15 for PC chip sales, and ARM trades at 40x FY14 EPS estimates.
He notes that, at this valuation, investors should keep the shares "at arm's length."
Moving on, Intel had a solid fourth quarter 2010, producing record earnings in the process. INTC had EPS of $0.59 on revs of $11.5 billion, setting the company up for a record year. Q111 sales are expected to be $11.5 billion (+/- $400 million), ahead of the Street consensus of $10.71 billion.
Recently, Intel has been shaken by announcements that Microsoft (Nasdaq:
MSFT) will become less exclusive with AMD (NYSE: AMD) and Intel with Windows, opening it up to ARM-based chips.
On their conference call, Intel CEO Peter Otellini said, "Many of you have asked us questions about how we will compete with ARM in the new segments of mobile computing. Our answer is very simple. As we have done for decades in the traditional computing markets, we will apply the world's most advanced silicon transistor technology to these new segments to deliver the lowest power, highest performance, lowest cost products on the planet. When these chips are combined with our support for the world's leading mobile operating systems, our proven ability to create broad ecosystem support and our growing software capabilities, I'm confident we will be very successful in these segments. These investments are the strongest possible statement of our confidence in our business model and our growth opportunities. And will extend our technology advantage even further."
Also, answering a question about Microsoft's announcement last week, Otellini said, "I guess I view it as being not a lot of new news and I can see positives and negatives for Intel in this announcement. Historically, Microsoft has only supported ARM on - in their phone OS and in their consumer electronics OS. So they've had ARM support for some time. In fact, in big Windows they've had support for, gosh, Alpha, PowerPC, MIPS, and at one point ARM on the Vista program that they dropped. So this is nothing really new from that perspective."
Continuing, "On the downside, there is the potential - given that Office runs on these products, for - there's some creep-up coming into let's say PC space. I am skeptical of that for two reasons. One, that space has a different set of power and performance requirements where Intel is exceptionally good. And secondly, users of those machines expect legacy support in terms of software and peripherals that has to all be enabled from scratch for those devices."
Shares of ARM Holdings are down 5.6% today, though they are up 30.5% for the month of January, mostly following the Microsoft announcement.
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