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ARMH: Evercore Starts at Buy on Expanding Market Prospects
By Tiernan Ray

Evercore Partners’s Patrick Wang late last night initiated coverage of chip technology licensor ARM Holdings (ARMH) with an Overweight rating and a $32 price target, writing that the stock ”
is a core technology holding as it provides the foundation that the leading chip innovators use for their next-gen SOCs [system-on-a-chip]” microprocessors.

Wang expects ARM to “encroach on Intel‘s (INTC) legacy turf” by invading the server market and the notebook computer market starting next year, leading to a dramatic increase in the company’s total addressable market (TAM):

We estimate ARM’s TAM to grow from 26.1bn units in 2011 to 36.0bn in 2015. As such, we anticipate robust growth and model royalty and licensing revenues at a 19% and 8% CAGR, respectively, from 2011 to 2015. With an improving mix, prudent spend, and a declining tax rate, we see a 20% CAGR to EPS through 2015. In the near-term, ARM is a thematic play for the next few quarters as we anticipate positive press on WinRT devices, microservers, and the “ARM Collective.”

At the same time, ARM won’t suffer significant losses in the mobile phone and tablet market from Intel, thinks Wang:

Despite an accelerating effort from Intel, we think ARM defends its share in smartphones / tablets for the most part. Our estimates assume 7% and 9% in losses for smartphones and tablets APs, respectively, through 2015. Offsetting these headwinds are a higher royalty rate and greater share in peripherals.

Wang is modeling slightly lower revenue this year than the Street has been estimating, though he thinks ARM could see upside given the company’s licensing business is “fairly robust” and given that “royalty expectations are in good shape.” He also thinks “Further, we believe an aggressive ramp at Apple (AAPL) and Samsung Electronics (005930KS) this quarter could provide some relief to 4Q royalties. Those two are quite significant as we think the pair represents over 25% of PD royalties and nearly 65% of overall smartphone / tablet PD royalties today.”

Wang is modeling $872 million in revenue and 14.5 British pence per share in profit, which, he writes compares to the average Street estimate for $876 million and 14.4 pence.

ARM shares today are up 7 cents, or 0.3%, at $26.96.
http://blogs.barrons.com/techtraderdaily/2012/08/14/armh-evercore-starts-at-buy-on-expanding-market-prospects/