- Imagination's shares have been hit by fears that MediaTek, a significant licensee, would continue to design its IP out in favor of ARM's
- Imagination's management has been quite clear that with its new Series 6 offerings, it could address the broader market
- A recent product announcement from MediaTek validates Imagination's claims
Imagination Technologies (OTCPK:IGNMF) recently got a bit of very good news when Apple (AAPL), a key licensee of the company's GPU IP for its A-series processors, announced that it had extended a multi-year GPU IP licensing agreement with Imagination. While the long-term fears of design out in favor of an Apple-designed GPU still loom, it seems that, at the very least, it has been pushed out by several years.
The second overhang, however, has been what had appeared to be a broad shift over at MediaTek - one of the largest smartphone/tablet applications processor vendors - from Imagination IP towards GPU IP from larger competitor, ARM Holdings (ARMH). When this concern was brought up on Imagination's most recent earnings call, CEO Sir Hossein Yassaie was actually rather calm about it, claiming that Imagination's expanded range of GPU IP (spanning the low end to the high end) would help it win back share at the low end (where ARM has been making some real inroads).
Finally, Some Evidence
It is common for executives to claim that things are going to get better - what else are they going to say? However, Sir Yassaie was vindicated today with MediaTek's announcement of its next generation ARM Cortex A17 based system-on-chip known as the MT 6595. The chip is a big.LITTLE configuration sporting four Cortex A17 cores and four Cortex A7 cores. In addition, instead of the recently announced Mali T-720 targeting mid-range phones, the chip actually packs an undisclosed variant of Imagination's Series 6 GPU - a nice win for Imagination!
Now, this is a fairly high-ish end chip even within the mid-range, so it'll be interesting to see what IP MediaTek selects for products lower in the stack and, of course, it will be interesting to see what other design houses such as Samsung, Broadcom, and others select for GPU IP longer-term. However, the MediaTek account was one that had investors pretty worried, so this win coming right after the Apple news is quite a treat for Imagination's shareholders and explains the nearly 8% rally in the 2/11 session:
The Battle's Not Over Yet, Though
While the MediaTek announcement coupled with the Apple agreement have likely helped to put in the bottom on the stock (and I very well may add to my position on a pullback), the battle is far from over. ARM's GPU designs continue to become better, the heavyweights are designing their own custom GPU IP, and competition from the likes of Vivante and NVIDIA in the IP space could add additional long-term pressure.
That being said, I do have a lot of confidence in Imagination's IP/R&D and I have even more confidence that longer-term, some of Imagination's licensees (such as Broadcom, Intel, and the like) will gain further share. I also believe that the uses for GPU IP, particularly in smart devices/internet of things will continue to skyrocket much to Imagination's benefit. In short, I'm willing to take the risks in light of Imagination's secular opportunities and structural strengths.
With MediaTek showing that it is not about to move everything to ARM, and with Apple likely onboard for at least two more generations of Imagination's IP, it's tough to see how the news-flow from here won't become increasingly positive. As a result, I'm comfortable owning shares at the $3 level and will likely add to my position opportunistically.