Chip designer Imagination Technologies has been under the cosh recently.
Its shares have fallen around 16% in a week, partly due to investors shunning the technology sector but also thanks to worries about it using market share at key customers like Apple and MediaTek. But analysts at Morgan Stanley believe the concerns are exaggerated, and an upbeat note from the bank has helped lift Imagination's shares 20.7p or nearly 8% to 282.8p. The bank said:
We believe the fall is overdone as Imagination's graphics processing unit (GPU) is in the latest Apple iPhone products and it continues to see design wins at MediaTek.
Apple hiring at least a dozen former AMD GPU employees has led to worries Apple is developing its own GPU technology, instead of using Imagination's. This is not a new rumour and started back in May 2013. Apple currently has an entire team of engineers that designs its CPU chips, however it still uses Arm's processor architecture. We believe the hiring of GPU engineers indicates Apple will do the same for the development of the GPU, and Apple will continue to use Imagination's architecture. Management reiterated to us they have a strong and very long relationship with Apple and are comfortable that Apple's graphics efforts are based on Imagination's technology.
Recently Arm unveiled a licensing deal with MediaTek relating to its Cortex-A50 cores and the next generation of Mali. This lead to fears Imagination would lose out, but Morgan Stanley said:
MediaTek signed a multi-year license agreement for the PowerVR Series6 'Rogue' technology days in September and Imagination could be in the Octo-core MT6599 chipset for LTE smartphones, indicating the market may be overestimating market share loss at MediaTek.
On 24 times PE, we remain overweight on the stock given the new iPhone 5S uses Rogue, MediaTek license extension and Imagination's exposure to Broadcom all indicating Imagination is well positioned to grow royalty revenues going forward.
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