Good news re ARMHY lately, including earnings. Here's an article just published in Smart Money:
Shot in the ARM?
By Danny Hakim
A BRITISH CHIP company with
Internet-like stock movement has
helped propel two mutual funds to
the top of the charts this year, but
managers for both funds appear to
have gotten skittish at the 221%
runup of ARM Holdings (ARMHY).
One of the funds is
Nicholas-Applegate Global
Technology (NGTIX), an
institutional offering that you can't
buy unless you pony up $250,000.
That's too bad, because the
Nicholas-Applegate fund is more
than 30 percentage points ahead of
any other fund, with a 159%
year-to-date gain. The other
hot-performing ARM player is Van
Wagoner Emerging Growth
(VWEGX), tops among retail funds
with a 122% gain.
Certainly, these two funds and the few others that got in on ARM before the
year began have done nicely. At the beginning of the year, it was a top five
holding in Nicholas-Applegate's portfolio, and a more modest position in Van
Wagoner Emerging Growth. It also has helped Julius Baer International
Equity (BJBIX) stay on course for a fourth consecutive year among the top
quartile of foreign stock funds, according to the fund-tracking firm Morningstar.
"We're very happy shareholders," says Riad Younes, co-manager of the Julius
Baer fund. "You have a small-cap stock which has the chance to become the
standard in a fast-growing market."
So what exactly does ARM do? We'll begin by decoding a series of techie
acronyms. ARM stands for "advanced RISC machines," the former name of the
company. RISC? That stands for "reduced instruction-set computing." And that
means...? A RISC chip is not the Intel (INTC) kind of chip that runs your
desktop PC. The 32-bit RISC processors that ARM designs are the brains
behind lower-powered chips, embedded processors used in "Dick Tracy types
of devices," as SG Cowen analyst Raj Seth puts it, things like cell phones,
PalmPilots and digital cameras. The world's most prevalent chips are still the
high-powered CISC chips, short for "complex instruction set computing," like
the Pentium. But lower-powered chips are starting to take off as demand
increases for handheld technologies and "smart" appliances.
"This is a franchise," says Seth. "Much like Intel became dominant in the
desktop, these guys have a chance to become the dominant name in
embedded processors."
Apple Computer (AAPL) and Britain's Acorn Computing put up the seed
money to launch ARM in 1990. Acorn developed the first commercial RISC
chip in 1985, and Apple wanted to use the company's embedded processors in
its Newton, the forerunner of today's handheld devices like the PalmPilot. (The
struggling Acorn was bought out by Morgan Stanley in April, giving the
investment bank several million surging ARM shares.)
"Acorn had this great architecture, but Apple wasn't going to work with Acorn
since Acorn was a competitor," explains ARM spokesperson Julie Seymour.
So 12 Acorn engineers were spun off into a new company, which also received
capital from VLSI Technologies (VLSIH).
Acorn and Apple's offspring, ARM, bills itself as an "intellectual property
provider." That's one thing analysts like about the company -- there aren't any
of the costs or concerns associated with manufacturing. To actually build its
RISC chips, ARM has created a web of partnerships with 34 different
companies, a who's who of the semiconductor and electronics industries,
including Intel, LSI Logic (LSI), National Semiconductor (NSM), Cirrus
Logic (CRUS) and Lucent Technologies (LU).
ARM's profits come both from licensing agreements and royalties received for
each product shipped with an ARM-designed brain. Considering these
embedded processors are turning up in everything from dishwashers to Furbys,
analysts see huge potential for market expansion, and analysts think ARM's
licensing deals could establish it as the mapmaker of embedded processors.
Once companies start using ARM's designs, it's much easier for them to
upgrade using new ARM architecture than start over from scratch with
somebody else's. A stream of deal-making news has been driving the stock
price, most recently a rumored strategic alliance with Texas Instruments
(TXN).
"This is a multibillion-dollar market and you have only two independent
players," says BancBoston Robertson Stephens analyst Andrew Bryant,
referring to MIPS Technologies (MIPS), a California chip-design company
most active as a designer of higher-powered 64-bit chips, such as the one it
designed to be the brains behind the Nintendo 64 home-video-game system.
"It's very easy to make a case that either company, or both, will succeed,"
says Bryant.
On Wednesday the company put out a positive second-quarter report,
reporting a 79% rise in pretax profit for the first half of 1999, compared to the
same period last year, beating analysts' estimates. Revenue rose 48% over
the same period, and ARM received royalties on 28.6 million units in the first
quarter, up 433% from a year ago.
So is ARM a screaming buy? Not exactly. Analysts, while bullish about the
company's prospects, are cautious about the runup of its share price. ARM is
currently trading at a little over 300 times earnings with a $3 billion market cap.
And what do the managers of two of the year's hottest funds think? Neither
Garrett Van Wagoner or Nicholas-Applegate's team was available for
comment, but their actions tell the tale. Both have taken their money off the
table this year and sold off their ARM positions.
Analysts say ARM's price might have gotten ahead of itself. "Based on the
valuation, I'm looking for opportunities to buy it cheaper," says BancBoston's
Bryant, who has a long-term Attractive rating on the company, below a Buy
rating. SG Cowen's Seth has a Buy rating on the stock. "The business model
is solid and we expect a continued stream of positive news," says Seth.
"People are paying up for ARM on the prospects of what it can be, not
necessarily what the current financials merit. But ARM can be a lot." And
Morgan Stanley Dean Witter has a Neutral rating on the stock, explaining in a
briefing released this week that the firm had a "positive view on the long-term
fundamentals" but felt the market had "discounted a great deal of near-term
news."
One stalwart is Younes of Julius Baer, who says he picked up ARM at its IPO
last April, which coincided with its offering of American depositary receipts --
shares that trade on a U.S. exchange. Since then, Younes has added to his
position and the stock has grown from under 1% into the fund's largest
position, about 3% of the fund's $75 million in assets. He says he is wary of
selling too soon.
"Many intelligent analysts had a Neutral rating on the stock six months ago,"
Younes says. "It went up 200%, and they still have a Neutral rating. It's like
using a ruler with millimeters when you're trying to measure in angstroms, or
trying to forecast Intel, Cisco or Microsoft 10 years ago. Anyone who tried that
looks stupid now."
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