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I believe that I may have severely underestimated the fragility of ARM's (NASDAQ:ARMH) share price in the face of potential design win loss to Intel's (NASDAQ:INTC) chips. In just a couple of days, shares of ARM Holdings have crashed from $50.56 to the most recent close of $45.82 following ARM's recent investor meeting. Morgan Stanley (NYSE:MS) recommending shorting the shares on almost exactly the same reasons that have fueled my thesis (valuation, Intel threat, ASP erosion in smartphone space, etc.), which may have sparked this initial drop. However, I believe that we are now about to see a fundamental shift in sentiment that will do some very serious damage to ARM's multiple. The upcoming "Computex" event in Taipei, Taiwan will likely trigger the next leg down.

Intel Unleashes The Kraken At Computex

I believe that a nontrivial part of the recent sentiment change is the likely Galaxy Tab design win for Intel. The financial impact of this loss is likely to be negligible, but the buy-side and the sell-side alike will begin to model potential market share loss scenarios not only in tablets, but potentially in smartphones as well. With each major design that goes to Intel (and the resulting cessation of a good portion of the royalty streams to ARM in those designs), ARM will see points shaved off of its earnings multiple (52x CY2013E) and perhaps even a lowering of the actual estimates.

The risk is that Intel is likely to start talking up further tablet design wins for its Android-oriented "Clover Trail+" platform. In fact, I would not be surprised if Intel were even to show off some Bay Trail designs, although those would not likely hit the market until Q4. In any case, the more "buzz" Intel is able to generate, the worse it is going to be for ARM's earnings multiple, which is generally a reflection of sentiment and confidence in the growth prospects of the business.

How Low Can ARM Go?

This is the next question -- how much downside is there for ARM in the near term, should all of this play out? Well, the lowest that the multiple has been was 20x during the financial crisis, so I would suggest that a hard floor would be $17.60/share, applying this multiple. I would then propose that as fears about Intel share gains ramp, a forward multiple of 35x, or a share price of roughly $31/share, would be a reasonable downside target (~32% downside from current levels)

Things get really ugly if the actual earnings numbers start heading south thanks to share gains, which of course not only whacks multiple, but also the actual earnings part of the equation, but I do not expect that ARM will post negative Y/Y growth in the foreseeable future.

Realistically, the shares have strong support at the $44 level, and extremely strong support at about $40. Further, the odds are stacked against the short trade given the bull market, coupled with the fact that ARM's rise has been largely a "melt up," which means that plenty of support was left on the way up. However, I believe a good part of ARM's run is that it is a momentum/darling stock riding the secular bull market, so should the macro environment start to deteriorate, or should the general market see a broad correction, the momentum stocks like ARM will be the first to get their heads lopped off, support levels notwithstanding.

Conclusion

I think that the next broad shift in sentiment could come at Computex in light of what Intel may have planned, which could drive shares lower in the near term. The only thing that keeps me on edge about recommending shorting here after two huge down days is that the technical picture isn't exactly ugly as the majority of the "air" seems to have been let out of the balloon from $50 and the first major support comes up at the $44 level. This, of course, would be no barrier in the case of some really nasty sentiment change or news event that leads to a big gap down.

This stock has managed to burn overzealous shorts in the past, but at least in this case, we now have a real potential catalyst -- one that now has some real teeth to make the trade work.

Disclosure: I am short ARMH, and I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.