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ARM shares slide at end of an era

Article By: ,  Financial Analyst
October 21, 2014 7:12 PM

ARM Holdings had a good day, that turned into a bad day, that underlined the stock’s underlying weakness.

After the British semiconductor designer reported a 9% jump in third-quarter pre-tax profit to £101.2m this morning, its shares gained 4%, at the time the biggest rise on the UK’s benchmark FTSE 100 index.

But the stock reversed within hours and continued to slide.

Its stock closed as the worst-performer on the main board, down 5.3% at 796.94p.

 

And ARM’s highly liquid American Depository Receipt (ADR) traded almost 6% lower at $39.11, by early evening London Time.

 

This is despite the firm, which has an almost unique business of semiconductor design licensing and royalties, saying it saw strengthening demand and growth.

Revenues, denominated in dollars, came in at $320.2m, up 12%.

Market expectations were $326.3 million.

ARM chief financial officer Tim Score said earlier, strong iPhone sales were “helpful” for the short-term outlook and supported by data from ARM’s other manufacturing partners.

“We certainly have seen an uptick in mobile,” he said at a press conference.

He expected Q4 dollar revenues to be in line with market expectations of about $350 million.

Processor royalties would continue to grow in the mid-teens as more of ARM’s latest technology was deployed in consumer products, Score said. Growth was 11% in Q3.

But the predicted recovery would still be weaker than the 19% growth ARM forecasted earlier in the year.

ARM investors seem unconvinced by the firm’s reassurances.

 

Further reasons for the stock slide

  • It looks like the early rise was based on Apple’s strong earnings on Monday
  • (ARM has designed components used in Apple products for years and its designs are also found in iPhone 6, for which Apple posted huge sales on Monday)
  • ARM stock has trended lower for more than a year since failing to overcome all-time highs between 1111p and 1112p twice—once in May 2013 and again last December
  • Demand for high-end smartphones, made for example by Samsung, is slowing
  • Strongest part of the market is in cheaper handsets from Chinese manufacturers that command lower royalty rates
  • Investors are accustomed to ARM’s circa-15% revenue growth rate, but that reflects growth of a former era which now looks unlikely to be sustained
  • A number of one-off benefits flattered the Q3 results, underscoring their weakness

 

 

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