We are placing ARM Holdings (ARM) under review while we dig deeper into the company's fourth-quarter earnings and revisit our long-term assumptions surrounding the firm. The company reported excellent fourth-quarter results that were modestly ahead of our expectations. Revenue was up 14% sequentially, driven by higher processor royalty revenue due to an increase in ARM-based chip shipments into handsets and a variety of other electronic devices. Meanwhile, processor licensing revenue came in a little ahead of our expectations, up 28% sequentially, which we suspect is due to the firm's recent agreements with Microsoft (MSFT) and Nvidia (NVDA). However, the company also saw healthy adoption of ARM-based microcontrollers, or MCUs, which actually caused the firm's average revenue per chip to dip slightly in the quarter. Nonetheless, ARM's fortunes will likely remain tied to the smartphone and tablet markets for the foreseeable future, especially as these devices incorporate higher-priced, ARM-based silicon content. We will likely raise our fair value estimate for the firm (currently 322p per share), but given the run-up in ARM's stock price in recent months, we don't expect to change our tune and come to the conclusion that ARM is undervalued today.
Brian Colello, CPA is an equity analyst with Morningstar.