Why ARM Will Continue to Remain a Safe Bet
Subhadeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chip designer ARM Holding’s (NASDAQ: ARMH) army of licensees finally seem to have been assured that they are marching on the right track. The UK-based technology giant, which specializes in licensing its chip designs to some of the world’s best known chip manufacturers, has outlived present market trends as it reported a rise in both its top and bottom lines during the company’s second quarter. ARM’s unique market positioning of not getting into the actual chip manufacturing process and yet earning a royalty every time a chip based on its design is shipped, seems to have worked the necessary magic. The company has indeed been able to cash in on the booming wave of smartphone and tablet sales by spreading its technology across all areas. Add to it the fact that the company’s energy efficient chips are ideal for mobile devices where battery life is a major determining factor, and you really seem to have a winner in your hands.
What also makes ARM stand apart is the fact that its processors can be found in Apple’s (NASDAQ: AAPL) iPhone and the iPad, Samsung’s Galaxy line of smartphones and at least one version of Microsoft’s (NASDAQ: MSFT) yet-to-be-released Windows 8-based tablet. With Samsung’s Galaxy smartphones already declared a major hit worldwide and Microsoft’s ‘Surface’ launch receiving decent reviews, ARM should not have a major problem in retaining its market dominance in mobile-based processors. And Apple fans must be already screaming that upcoming iPhone 5 sales alone should keep the ARM flag flying high. But then again, with Apple sales missing analyst estimates recently, this may sound a tad optimistic at present. And let’s not forget that even ARM is apprehensive about the economic slowdown and its effect on smartphone sales. The company has predicted that the fourth quarter may fall short of market expectations due to less-than-anticipated demand for its products. And the company is not alone in its cautious outlook as licensee Texas Instruments’ revenue outlook also missed analyst estimates.
Having said that, one has to accept that ARM has done a commendable job in the company’s second quarter. After all, the fact that ARM recorded a 9% year-on-year rise in chip shipments against a 4% drop in shipments for the entire industry is no mean task. Not to forget a 14% year-on-year increase in processor royalties as compared to the industry revenue actually dipping by 7%.
And that again brings us to the final analysis – is the day near when ARM is going to outpace Intel (NASDAQ: INTC), the actual chip market leader? While such a prospect looks increasingly tantalizing, given that smartphone and tablet sales have recently outpaced pc sales (which Intel dominates), it is unlikely that such a scenario will occur soon. After all, Intel is certainly not sitting idle with its x86 and Ivy Bridge line of processors and is going all out with Google (NASDAQ: GOOG) in a bid to cash in on the Android upgrades. At the end of the day, it’s more likely that both will be market leaders in their own fields and based on their own set of strengths. I recommend staying long on ARM as this is a stock that will not let you down in the near future.
subhadeeptech has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Intel, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.