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ARM's (ARMH +2%) chip royalty rate will rise to 1.5% next year from 1.3% last year, and could...

ARM's (ARMH +2%) chip royalty rate will rise to 1.5% next year from 1.3% last year, and could approach 2% by 2020, says Canaccord's Matthew Ramsay in an upbeat note that's helping the CPU core giant make new all-time highs. Higher Cortex CPU core and Mali GPU core shipments are lifting ARM's chip royalties, as is the adoption of quad and (in Samsung's case) octa-core mobile processors. Ramsay adds ARM, which saw chip shipments rise 35% Y/Y in Q1, could have a 50% CPU share by 2020, up from a current 32% - if that happens, microcontrollers and other embedded chips will play a big role. Shares trade at a lofty 53x 2013E EPS.
Comments (1)
  • Don't you just love the power of compounding?


    more chips X ASP/chip X higher royalty rate/chip = more $


    This report says the first term is up 35% Y/Y, and the third is projected to be up 15% Y/Y. Don't know about the middle term. Greater chip complexity + inflation would suggest it should also go up. But if I understood the year-end report correctly, it actually may have gone down last year because a relatively smaller increase on the very large number of low priced chips actually more than offset the greater percentage increase in the number of highend chips.


    If we assume the middle term is neutral and the other two remain as suggested above, that would lead to greater than 50% increase Y/Y in royalty revenue. The quarterly report indicated royalty revenue up 33% Y/Y, which would indicate ASP/chip continued to decline in Q1 despite the rapid growth in higher value tablet & smartphone chips.


    Looking at a different angle, don't know if one should project the relationship to hold, but couldn't help noticing that ARMH's licensing revenue for the past quarter just about equals their operating expenses. So that leaves royalty revenue to cover taxes, investment (low due to their business model) and profit.


    So, is ARMH's PE really all that "lofty"? PE can be a useful measure for a mature, low growth business. But as is often pointed out, PEG can be a more useful measure for growing businesses. Most money managers with a time horizon beyond their next bonus check will tell you that if you can buy consistent growth north of 15% for a PEG less than 2, you'd likely do well to jump on it. If you calculate ARMH's PEG based on earnings growth for the reported quarter, it is less than 1. If figured on the indicated growth rate in royalty revenue, it is still less than 2. Maybe that PE is not so lofty after all.
    1 May 2013, 05:54 PM Reply Like
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