Why Ceva Can Even Survive an Apple Drop

Includes: ARMH, CEVA
by: Shlomi Cohen

One of the hot rumors in the stock market these days is that when Apple (NASDAQ:AAPL) unveils the fifth generation of its iPhone this summer, it will include NFC (near field communication) abilities. NFC is very short range (up to 4 centimeters) wireless communication which is used for payments made through a mobile phone.

Barclays Capital analysts mention an example of one of the applications that will be launched as a result of collaboration between VeriFone (Nasdaq: PAY) and leading coupon site Groupon. During a ride in a taxi equipped with an advanced Verifone meter, communication between the rider's smartphone and the taxi meter can facilitate a coupon being printed from the meter for a movie or restaurant.

The rise by Ceva Inc. (Nasdaq:CEVA), which I hold in my portfolio tracked at "Globes", is also connected to the mobile Internet world. The company is one of the leaders in supplying DSP (digital signal processing) solutions for the multimedia and communications processors that are found in every one of the 2 billion mobile devices sold worldwide each year, most of them being mobile phones. Ceva's business model is similar to UK central processing unit solutions giant ARM Holdings (NASDAQ:ARMH), which trades with a $12 billion market capitalization. That is, it sells solutions to processor suppliers such as Qualcomm (NASDAQ:QCOM)-- which leads in the cellular sector-- and receives licensing fees and then royalties from each processor.

For a long time, until September, when Ceva spent a lot of time in a narrow range of $10-12, its management said that in their opinion they deserve sales and profit multiples similar to ARM's, since their business model is the same, and because sometimes Ceva's growth rate was even higher than ARM's. It appears that since September, that message has been internalized by the market, and the share price has more than doubled, but it still does not have ARM's multiples. Based on earnings per share (EPS) expected for this year, ARM trades at 43 times the estimate, while Ceva trades at 30 times.

Ceva will make big money in the coming years mainly from royalties that it will receive for its DSP solutions which will be part of Nokia's (NYSE:NOK) second generation devices, which sell hundreds of millions of units each year, mostly in Asia. Its competitor, Texas Instruments (NYSE:TXN), announced two years ago that it will gradually get out of the DSP sector. This led to a situation in which Ceva is gradually becoming the biggest supplier to Nokia through most of its processor suppliers.

On the other hand, the "sexy" money that Ceva makes and that the capital market loves most comes from Apple's (AAPL) iPhones and iPads, through the cellular division of Germany's Infineon (OTCQX:IFNNY) which was sold to Intel. (This despite the fact that it is considerably less money than what Ceva will receive over the coming years from Nokia.) Recently, there were concerns that Ceva's share will fall on market rumors that with the iPhone 5, Apple will move permanently to communications processors by Qualcomm, which has its own DSP solutions.

Recently, Apple launched separately various versions of the iPhone 4 and the iPad 2, with Qualcomm processors that will be appropriate for Verizon's CDMA network, while at the same time it remained with Infineon for AT&T's network. Ceva's share price, which broke an all-time record last week of $27, apparently won't fall even if it completely loses Apple as customer for the iPhone 5, because the market understands that the big money will come from Nokia.

Published by Globes [online], Israel business news - www.globes-online.com - on April 5, 2011 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2011

Disclosure: Author holds a position in CEVA as part of his portfolio tracked at "Globes".