ARM Holdings plc (ADR) (NASDAQ:ARMH)

IB 90+

I normally wouldn't bet on stocks to go down, for several reasons, but this is too much of a great opportunity. ARM will go down and the slide starts soon, a realistic target would be around $12 and I'll explain why further on.

Tests show that Intels new mobile CPU beats everything that ARM can deliver. Even the new Galaxy S4, that is "cheating" at little by putting two CPU's with four cores, is beaten by one of Intels new Clower Trail+ with only two cores (acts like 4 cores because of Intels HT technology).

http://www.android.gs/galaxy-s4-vs-lenovo-k900/

Besides being more powerful, it will also beat the ARM CPU's in total energy consumption, because of a combination of highly advanced power saving technologies. In this way Intel is taking away ARM's only technological advantage, which is power efficiency.

This is really bad news for ARM and especially ARM's shares that is severely overpriced at a P/E of almost 90 and a price/book ratio above 10. They are going to go down.

(P/E calculated based on current share price on LSE of 1030 and 2012 annual report EPS of 11,51. The American stock is at at P/E of around 80, which is probably caused by exchange rate development.).

Further bad news for ARM is that Intel is going to launch a much faster CPU in Q3 of this year (announced monday 6th April 2013), based on the industry leading 22nm Silvermont architecture. Not to mention that Intel is going for 14 nm next year (much more power efficient).

Even worse for ARM is that they are going to compete with a major brand. They are going to fight with the "Intel Inside" logo, which will sell a lot of phones just by brand loyalty/recognition. Intel also allied itself with Samsung, Huawai, Fujitsu, Vodafone, Sprint and others through the Tizen platorm, which will guarantee Intel some sales. Intel is also allying itself with Baidu, to conquer mobile markets in China.

R&D is essential for keeping a lead in the technology business, a relatively small lead in performance will mean a big difference on the bottom line. To put things into perspective Intel's R&D was 30 times bigger than ARM's R&D in 2010, it was 32 times bigger in 2011 and almost 38 times in 2012. This is one of the reasons why Intel has the lead on mobile processors now and will keep increasing their lead.

ARM will not be wiped off the surface of the earth right away, but Intel will conquer all the high-end phones and tablets, where all the big margins are. ARM will probably hang on to the low-end phones and tablets for a long while, as their chip license is very low, but growth prospects for ARM look grim and they're definitely not worth a P/E of around 90.

I don't want to be overly pessimistic, but the facts are overwhelming, ARM is extremely overpriced, they lost the single technological advantage they had, they are competing with Intel that has a major brand and an enormous R&D budget. The mere fact that a phone needs two CPU's, tells us that the world is ready for something more powerfull and Intel is ready to deliver.

Based on an assumption that the P/E has to go down to around a more reasonable level of 20, then the share price should go down to a quarter of the current share price. Further there will be som earnings losses, which will push down the price further down. So my target for the american stock is around $12, for the English stock it would be around £250.

By the way. Something is not right with ARM's budget, their net-income is rising way faster than Cash from Operations. The ratio grew at a very unhealthy pace:

2009 0.479852709
2011 0.809813735
2010 0.623717476
2012 1.408540472

and their change in working capital actually became negative the last two years.

Changes in Working Capital
2009 14.59
2010 22.95
2011 -10.73
2012 -106.80

Other facts:
Intel's revenue is 56x that of ARM's revenue.
Intel's R&D budget is more than 10x of ARM's revenue.
Intel's R&D budget is around 37x of ARM's R&D.
Intel has developed a framework for intelligent systems, that will probably push ARM out of some of the consumer devices like set-top-boxes, TV's and so on.
Intel has 5 nm archtecture in their road-map.

CEO+

Too far, too fast. Time to come back down to earth.

Intel is coming after it's market share. It won't be able to compete on the same level.

Grossly overpriced stock in a grossly overpriced sector in a slighlty overpriced market

Their commitment to open systems gives them an edge Intel's fully baked system cannot compete with.

Up to a PE of more than 250. It seems incredibly unlikely that earnings will ever grow to the point that this sort of valuation is reasonable. It may well be a darling now, but Ben Graham says the market will come to its senses eventually.

expensive on all valuations

too high valuation relative to INTC.

The $17 billion upstart ARM is UP three-fold in just the last two years and is up 34% year-to-date! At only half this pace, the stock will hit $55.84 in a year. Its Price/Earnings (P/E) ratio is a staggering 169 as revenues and earnings grow 21 to 34% yearly. ARM trades at a rich 10 times book value. Yet its A6X processor is in the latest iPhones and iPads, both of which lead the markets for smart phones and their big brother tablet PCs.

not enough revenue growth to justify this price. Intel will crush ARMH with massiv R&D.

ARMH and QCOM are the two big winners of the mobile chip space. INTC is playing catchup, and is unlikely to break through.

There is a small Southeastern Asian mammal known as the binturong.

And I've been too wrong on this pitch to say anything else!

Wow. New to the service but it seems unFoolish to pick up a stock at a P/E of 207. That seems to be well into the "Emporer's New Clothes" levels where everyone's groupthink has priced this well above the potential growth. It seems to me that stocks are worth certain P/E ratios because we as a community agree that it is our currency, and that sooner than later ARMH holders will have some buyers regret.

Barchart
Strong signal
Good Direction

The chip designer still leads the mobile chip evolution ... and it's going to stay that way.

competition will drive the valuation down

The upgrades for hand held cellular phones. Faster speed and more memory.