Arm Holdings (ARMH) took a beating yesterday as CEO Warren East warned of weaker sales expectations, saying that some of its customers are "indicating that they are not expecting an uplift, and mathematically that will hit us." At least he didn't sugar-coat the sad truth. If I was interviewing him, I would have asked, "By hit, do you mean lightly smack, or uppercut to the chin?
Perhaps the answer to this question I wish I could have asked was answered by Deutsche Bank's downgrade to 'sell' a short time later. Deutsche Bank's Kai Korschelt cited these reasons for the downgrade:
- ARMH may experience pricing pressure from partners such as Qualcomm (QCOM), Nvidia (NVDA) and Broadcom (BRCM), thanks to lower pricing in mobile devices.
- Korschelt also sees Intel making big strides in mobile:
"We believe that Intel could manage to win between 5 and 10% unit share in the next 3 years and possibly more further out in the future. While the immediate financial relevance of a 5 or 10% market share loss in smartphones and tablets for ARM is relatively modest, we believe when combined with the impact it could have on ARM's P/E, it could drive meaningful downside to the share price" (Source)
Wow, need I continue? Let's do so anyways by taking a quick look at the valuation and other fundamentals of ARM Holdings. Let's compare ARMH to who other than Intel (such a righteous choice).
Forward P/E (1 yr)
ARMH's monopoly-like advantage on the mobile chip market is coming to an end. With this inevitability happening relatively soon, ARMH's 55x P/E valuation is no longer warranted, especially when you could swap out into INTC, BRCM, NVDA or QCOM, which all trade at a much more reasonable levels. ARMH's sell off yesterday is just the beginning of a long-term valuation downtrend. Time to sell.