ARM Holdings plc (ADR) (ARMH), a semiconductor I.P. company, is leading in the handset and tablet space with both Apple Inc. (AAPL) and Samsung Electronics Co., Ltd. (KRX:005930) using ARM‘s I.P. in their devices, and the company is also solidly positioned to enter the communications chips market, says Patrick Wang, Managing Director at Evercore.
“ARM is a tremendous story going forward, and I think it is going to really unfold over the next couple of years. It is driven by the things we discussed earlier. They dominate the handset and tablet space today. When Apple and Samsung come out with their next phones, they are using ARM‘s I.P., intellectual property, to get there,” Wang said. “Apple and Samsung, if they want to stay at the high end, they have to keep blazing the trail and pushing the boundaries of technology. As such, if you are using ARM‘s technology, you are paying them a royalty fee, and it is in the 1.5% to 3.0% range today.”
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Additionally, ARM Holdings is entering the communications chips space, in which it will be applying its architecture to aid in the next generation of lower power consumption, Wang says. He believes ARMH‘s story has another 10 years to go due to the company’s solid technology and business model.
“As we look forward over the next three to five years, the ARM story is interesting, because they are also entering communications chips. They are taking their highly power-efficient architecture and applying it to the switches and routers out there that make up the Internet’s plumbing, and the same types of trends we see on a devices today, obviously the data centers and carriers want to be power efficient as well. So they are looking to improve performance while lowering power consumption, and so ARM has a very nice tailwind over the next few years,” Wang said. “ARM is a semiconductor I.P. company with solid technology, a great business model, gross margins in the 90s, and thus trade in the 40 to 55 times forward p/e range.”
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