Stock pick ARM Holdings takes a hit after running too far, too fast, retracing much of December gain

01/09/2014 7:04 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Shipments of devices—a category that in this case includes PCs, tablets, ultra mobiles, and mobile phones—will hit 2.5 billion units in 2014, according to technology market research company Gartner.

If you’ve been paying attention to “The PC is dead” argument on and off Wall Street, you won’t be surprising to hear that shipments of traditional PCs are forecast to drop by 7% in 2014 to 278 million units.

By the numbers mobile phones dominate device shipments with a projected 1.9 billion units to be shipped in 2014. That would be a 5% increase from 2013.

But the growth stars for the device universe come from the ultra mobile category of tablets, hybrids, and clamshells. The overall category will grow by 54% in 2014, Gartner projects. Inside that larger category, the worldwide market for tablets is forecast to grow by 47%.

Given those growth projections, I think it makes sense to own companies with the big pieces of this market. ARM Holdings (ARMH) is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ . And so are Apple (AAPL) and Qualcomm (QCOM.)

But as you might expect from these numbers, the war to grab market share in the fastest growing parts of the device market, already intense, will get even hotter in 2014.At the recent Consumer Electronics Show Intel announced a new line of small, cheap, lower power chips, named Edison, designed to go after markets addressed by ARM Holdings. Intel (INTC) has said it expects to ship 30 million processors for tablets in 2014. ARM, for its part, continues to go after the graphics market addressed by Imagination Technologies (IMG.LN in London) with its Mali design. MediaTek (2454.TT in Taiwan) has targeted Qualcomm in the Chinese mobile phone market after licensing 64-bit technology from ARM. Intel, not to be left out, has put together what DigiTimes calculates is a $1 billion marketing program to woo cell phone makers in Taiwan to its processors.

With competition that hot, Wall Street has decided its time to issue some downgrades. For example, today, January 9, Deutsche Bank downgraded ARM Holdings to hold from buy on valuation citing Intel’s recent smartphone design wins. The company’s ADRs fell 8% in New York on the downgrade. If you remember the conventional wisdom of just a few weeks ago that held Intel was so far behind in this market as to be irrelevant, you might wonder what has changed so radically as to justify going from a buy to a hold? (Your curiosity might be aroused even further if you remember all the speculation that Apple’s move to a 64-bit ARM chip in the iPhone 5S might indicate a move to ARM processors instead of Intel processors in its mobile and desktop lines.) What’s changed, I think, isn’t the market for ARM’s chips or the competition but the valuation of the stock. ARM’s ADRs climbed a huge 15% from December 12 through December 27 on enthusiasm about Apple’s (AAPL) move to a 64-bit ARM processor in the iPhone 5S (more revenue per iPhone for ARM) and MediaTek’s adoption of the same 64-bit technology to move upstream in the Chinese smartphone market.

Especially in the current market mood of profit taking 15% in two weeks is too far too fast. Even after today’s hit, though, ARM’s ADRs closed above their December 12 price.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple, ARM Holdings, and MediaTek as of the end of December. For a full list of the stocks in the fund, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

 

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