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March 7, 2002

Join the ARMHY Now?


Bob:

Have you seen any '03 earnings estimates for ARMHY? Can they do 35-40 cents in a reviving economy next year?

No, I haven't. Yahoo's consensus estimate for 2002 is 19¢ and I think it will be somewhere between 20 and 22¢ based on extrapolation of past data. I believe they will continue to grow revenues at 45% with a net margin of 22% or better for several more years. If my estimate of $16 an ADS for December 31, 2002 is correct, based on today's closing price of 13.80, that's a 19% annualized return (10 months)

Date Revenue % Growth
Y/Y 		Operating
Income 		% Op
Margin 		Net
Income 		% Net
Margin
6/30/98 16,568   3,005 18.1 2,469 14.9
9/30/98 19,022   3,440 18.1 2,722 14.3
12/31/98 20,753   3,602 17.4 3,153 15.2
3/31/99 21,110   4,178 19.8 3,289 15.6
6/30/99 22,787 37.5 5,334 23.4 3,997 17.5
9/30/99 25,850 35.9 6,518 25.2 4,687 18.1
12/31/99 30,482 46.9 9,446 31.0 14,209 46.6
3/31/00 30,115 42.7 9,821 32.6 9,493 31.5
6/30/00 34,995 53.6 11,163 31.9 13,300 38.0
9/30/00 39,028 51.0 11,634 29.8 14,798 37.9
12/31/00 44,560 46.2 13,461 30.2 8,954 20.1
3/31/01 46,211 53.4 14,851 32.1 8,807 19.1
6/30/01 50,619 44.6 15,780 31.2 11,227 22.2
9/30/01 59,074 51.4 18,442 31.2 13,156 22.3
12/31/01 56,925 27.7 18,056 31.7 13,266 23.3
(Y) 12/31/02 307,751 44.6     67,705 22.0
  Shares 342.6   
EPS 0.20
Price (P/E=80) 16.00

So far I have been reluctant to take a serious position due to the valuation, esp when comparing to someone like a QCOM, which still seems relatively cheap at around 30 times forward earnings. (Companies like BRCM and RFMD really look bloated.)

The stories are so different. Qualcomm is basically in one industry, cellular, with some very formidable political enemies who favor their native son's systems over CDMA. ARM is a story like I have never seen or heard before. Their cores are showing up everywhere. The worlds largest chip makers of all types are adopting ARM as their RISC processor cores. For some reason, ARM does not seem to have political enemies like Qualcomm does. Intel has a second sourcing problem in that it must license the competition to make their chips. ARM's business model gets around the problem without creating any competition for itself. ARM cores are in so many and diverse areas that it is not likely that ARM would be severely affected by a downturn in a particular industry as Intel or Qualcomm might be.

Intel is a wonderful story but the x86 chip is only about 2% of all chips made. The inexpensive yet powerful ARM cores will grab a much larger share of the chip market because they will find their way into all sorts of consumer products, specially consumer electronics: cameras, cell phones, printers, PDAs, DVDs, Wi-Fi and Smart Cards to name a few. It is highly likely that you used one or more ARM cores today.

ARM is a Cinderella story, pure and simple. From the ashes of the Acorn computer and the Apple Newton rises the core that enchanted Prince Charming. My only worry is that someone with very deep pockets will try to buy ARM Holdings. Alone ARM is a gold mine. As part of a conglomerate, the results would be diluted.

I don't know about BRCM but I do know that RFMD does not have gorilla power -- it will be competing with the likes of CNXT and CREE on the basis of price and quality. The kind of multiple that I'm willing to pay for ARMHY is much too high for RFMD.

Denny
"Demand creates queues. Supply gets rid of them."

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