Arm is one of the day’s biggest risers so far on hopes of a better 2015 for the chip designer, which supplies the likes of Apple and Samsung.
The company, which last week announced the appointment of easyJet’s Chris Kennedy as its new finance director, had seen its shares struggle last year on fears of a slowdown in the smartphone market. But analysts at Barclays said slower growth was now factored in to City expectations, and they expected subsequent surprises to be positive ones as other manufacturers followed Apple’s lead in using Arm’s new processors. Barclays said:
2015 is set to be a year of rapid migration to ARMv8 in smartphones: For the past year, Apple has been the primary shipper of ARMv8/64-bit application processors. The rest of the smartphone industry has been chasing Apple’s early move and 2015 will see a rapid adoption of ARMv8. We had previously anticipated around 30% adoption in 2015, but Arm has recently stated its expectation of a much greater 50% adoption. We estimate around half of Arm’s royalty revenue growth in 2015 to be supported by this migration, which drives a material increase in royalty rate for application processors.
We also expect Arm to begin to outline a path to even higher capital returns, something likely reinforced by incoming chief financial officer Chris Kennedy, who arrives with a strong reputation from his time at easyJet. Arm trades on 25 times/22 times 2016/2017 PE, very attractive multiples given the company’s strong positioning and around 25% compound annual growth rate in earnings. We reiterate our overweight rating and see potential upside to our £12 price target.
Barclays also said a weak pound was helpful to Arm:
Consensus expectations for Arm were set at a pound-dollar rate of $1.63 around the third quarter results; sterling has weakened by over 7% since then. We raise our estimates due primarily to the weaker pound and we expect consensus to follow over the coming weeks. Our 2015/16 earnings per share estimates are 12%/14% ahead of consensus and we expect this gap to narrow due both to the improving fundamentals (v8) and foreign exchange.
Arm shares are currently 21p higher at 999.5p.
