Arm has jumped more than 4% after a buy note, and despite one of its customers closing its mobile chip business.
Its shares are 40p better at 966.5p, making it the second biggest riser in the FTSE 100 at the moment, after analysts at Stifel began coverage of the Apple supplier with a buy recommendation. Analyst Lee Simpson said:
Near-term concerns (licensing lumpiness and slowing smartphone growth) appear overdone in our view. Instead, we expect Arm to have (i) strong royalty tailwinds (second half of 2015/first half of 2016), (ii) a growing licensing total available market, and (iii) an earnings accretive play for the Internet of Things...we see the company’s influence on the immediate software ecosystem as well as its own faster processor development (new GPU, CPU, VPU, Display IP every year) and its widening applicability in many market areas (mobile computing, datacentres, networking, Internet of Things, Automotive) as key to the emergence of Arm as the architecture of choice across the entire compute space over the long term.
We are initiating coverage of Arm with a buy rating on the shares and a target price of 1,150p.
But long term seller of the stock Liberum pointed out that Marvell, a US semiconductor company and Arm licensee, was closing its mobile chip business:
As the smartphone market slows and margin compresses chip vendors are backing out of the market. Marvell was an early Arm V8 licensee, so Arm may lose some licensing revenue as Marvell shuts the business.
Limited impact on Arm’s royalties as the other remaining Arm based chip vendors will pick up volume (Qualcomm, MediaTek, Spreadtrum). Risks to Arm’s licensing revenue grows.
Meanwhile Rolls-Royce has shrugged off suggestions from Panmure Gordon that it might issue another profit warning, adding 14.5p to 665p. Panmure analyst Sanjay, Jha said:
Trading conditions are deteriorating so fast that no one could begrudge the management another profit warning. Last week, the company informed us that its third quarter interim management statement will be issued on 12 November but the probability of an unscheduled statement before this date is now more than 50%.
It is clear from recent warnings from companies ranging from Caterpillar to Rotork that the capital investment world suffered a Lehman moment in August, and it is hard to see how things could have got better in September. The balance sheet pressures on the commodity complex combined with sharp depreciation in emerging markets currencies is bound to lead to delays, cancellations and renegotiations of contracts. Our best guess at this stage is that the earnings per share guidance will be moved from 55-62p to below 53p. We reduce our target price to 520p, from 600p.
