Yesterday on Jim Cramer's Mad Money TV Program Cramer called Arm Holdings (ARMH Charts) "the next Intel" (INTC Charts) because its microprocessors are more energy efficient than Intel's. Cramer said ARMH is in 95% of all smartphones and MP3 players. Jim said Arm gets 75¢ in royalties for every iPad sold which makes it a great play on Apple (AAPL Charts).
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What Cramer didn't say is they are "more energy efficient" because they are slower and don't do as much. The new Intel "core i7" powered desktop computer I am writing this on has hyper threading and four cores so it effectively has eight processors working at the same time on up to eight different tasks. Of course this will use much more power than an MP3 player that just plays one song or video at a time.
Mariam Metsinger reported:
Arm Holdings had an amazing analyst day last month when it reported its total addressable market is expected to double to 29 billion chips in 2014 from 15 billion in 2009. The company could get significant pin action from Microsoft (MSFT charts), as its next generation of Windows is likely to operate on ARM-based processors. ARMH is also diversified into other areas, and its technology is used in sensors, smart meters and hard drives.
While ARMH's multiple is 31, this is reasonable, considering its growth rate is 22%. Cramer would buy the stock when it pulls back 2 points from where it was Monday to $10.
A PE of 31 with a growth rate of 22% is a PEG of 1.4. I would not call it "a good value" (good value is when growth rate exceeds PE for a PEG under 1.0) but this PEG is not "unreasonable" as long as growth continues above 20%. It is easy to grow a small market but once it is large, growth slows as others want a piece.
I would think once the market is large enough, Intel could enter with its own low power chip such as its low cost Atom processor now used in low cost netbooks. Also, as the market matures, Apple could design their own chips and have them made at a foundry so they could keep the profits themselves rather than give them to ARMH. In fact, I would not be surprised to see Apple eventually go to a foundry build their own chip around Intel's atom processor where I believe the license fee to Intel could be less. They may use this to pressure Arm to lower prices. One thing for sure, it can be dangerous investing in companies with few products and customers as a large customer could go elsewhere for lower prices or more performance.
Finally, as users demand more functionality and multitasking from their portable devices, this will favor Intel and AMD with their multiple processors on a single slice of silicon. As the market for these devices get large enough for Intel to notice, I expect to see Intel (and probably AMD) release versions of their microprocessors optimized for low power rather than blazing speed. ARMH may continue to do well for years, but it is not without its risks.
- Arm Holdings, plc: ARMH Charts
- Apple: AAPL Charts
- Intel: INTC Charts
- Microsoft: MSFT Charts
- Jim Cramer Fan Club
- Mariam Metsinger: Cramer's Mad Money - The Next Intel
Disclosure: I own Intel and Microsoft in my personal portfolio. I purchased Intel and Microsoft in 1993 at $3.67 and $2.43 per share, respectively. I also cover both in K"irk Lindstrom's Investment Letter" and currently hold positions in both for the "Explore Portfolio."