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.
All amounts in US$ unless otherwise noted.
From ARM’s analyst day yesterday in London where ARM management highlighted strong longterm market and royalty growth opportunities in both high- and low-tier smartphones.
We believe ARM is well positioned to benefit from quickly increasing emerging market feature phone to smartphone upgrades, ramping low-tier tablets, and high-tier smartphone platform refreshes that should drive royalty TAM growth and rate expansion. Further, with a growing number of ARM partners moving toward multi-core Cortex-A, big.LITTLE, and ARMv8 designs at leading edge process nodes, we anticipate strong license sales in the near to medium term will drive strong royalty revenue growth and both operating and earnings leverage long term. We reiterate our BUY rating and raise our price target to $56.
Our Q1/13 monthly handset sales surveys and recent March quarter results and June quarter guidance for ARM mobile chipset partners are consistent with ARM’s estimates for very strong growth of the low- and mid-tier smartphone markets and also resilient growth of the high-tier market driven flagship launches and 4G/LTE upgrades.
At its analyst day, ARM shared its target of 15-25% smartphone royalty sales CAGR through 2017 and anticipates smartphone unit CAGR of 20% for the industry during the same period. In fact, this estimate includes growth in both the high- and lower-tier smartphone markets, and we believe ARM will generate significant royalty revenue growth from both tiers driven by a royalty rate expansion multiplier in the slower-growing high-tier market and upgrades
from lower royalty feature phones in lower tiers.
Due to increased royalty estimates from lower tier smartphones and tablets, we are increasing our 2013 earnings/ADS estimate from $1.01 to $1.02 and our 2014 estimate from $1.31 to $1.35.
Our $56 price target (from $52) is based on shares trading at
roughly 42x our 2014 normalized earnings/ADS estimate.
- ARM’s Sales Beat Analysts’ Estimates on Demand for Smartphones (bloomberg.com)