Arm has seen its shares drop sharply since their peak in April, on growing concerns about a slowdown in its key smartphone markets.
But a couple of positive notes has seen the chip-maker - which has also been the subject of vague bid speculation recently - move 14p higher to 932.5p. Barclays said:
Arm’s equity story will continue to be one based on strong top-line growth contributing to sector-leading earnings and cash flow growth. With shares trading above 20 times forward earnings, and on occasion above 30 times, the sustainability of that growth is paramount for valuation.
We see both near- and long-term prospects being as strong as ever, although recent concerns around end market growth have caused a material underperformance for Arm shares (down 18% over the past 3 months versus the European technology sector down 6%).
End market and cycle concerns are tough to fight in semis, but we continue to argue Arm will be a material outperformer relative to the sector given a variety of structural drivers.
With shares now trading on 24 times and 20 times 2016 and 2017’s estimated PEs, for a company delivering 24% compound annual growth rate in earnings per share and with the prospects of materially higher cash returns, we find valuation highly compelling for this long-term core holding and reiterate our overweight rating and £12.50 price target.
UBS also issued a buy note after a meeting with the company, albeit lowering its target price from £12.50 to £11.60:
UBS hosted Arm management on the road and the clear focus of questions is on the weakness seen in the smart-phone market particularly after weak reporting from at key partners - Mediatek and Qualcomm.
The central theme is whether Arm-specific benefits (v8, multi-processors, graphics share gain) can offset the slow-down being seen in the smartphone market. Investors are polarised between 1) Arm specifics offset the slow down this year, next year sees a demand recovery and then Arm moves into new areas and 2) The slow-down will impact Arm such that consensus is too high which is not priced into the stock. We are between these two. We feel consensus is too high for 2016 but believe that Arm’s company-specific drivers should see it through the secong half of 2015 and 2016 and that the growth is not priced correctly by the market. As such, investors with a longer term time horizon should invest.
