Analysts Upgrade ARM Holdings Fair Value Estimate

Despite five straight years of double-digit revenue growth from 2010 to 2014, analysts foresee another strong growth year from ARM in 2015, forecasting 20% sales growth

Brian Colello, CPA 19 February, 2015 | 2:54PM
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ARM Holdings (ARM) holds an extensive library of microprocessor intellectual property and has particular expertise in low-power high-performance chip architectures. ARM's IP is the backbone of most processors used in mobile devices today, and strong tailwinds from the shift to higher-end smartphones and the proliferation of connected devices as part of the Internet of Things should bode well for ARM in the years ahead.

ARM essentially develops the blueprints that allow a variety of leading chipmakers, such as Qualcomm, Apple, Broadcom, and Samsung, to design many of their semiconductors. Just as Intel's chips dominate the PC market, ARM-based chips are found in almost all handsets, where low power and longer battery lives are critical factors. In exchange for its IP, ARM collects both an up-front license fee and ongoing royalties based on the price of each ARM-based chip sold.

The source of ARM's wide economic moat, in our opinion, is intangible assets stemming from the firm's IP, as well as the strong ecosystem of partners around the ARM platform. ARM's licensees typically start with the firm's core IP and then modify these blueprints in order to differentiate their chips. Yet, all of these firms would have to make substantial reinvestments to build new architectures from scratch.

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About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.

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