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Brokers lower ARM as Apple runs out of juice

Reports that Apple's iPhone 5 sales have not mapped out as planned might be one extra reason not to chase the share price of ARM higher.
Brokers lower ARM as Apple runs out of juice

As investors fret that Apple (NASDAQ:AAPL) might be losing its touch, two brokers have cut their ratings for chip designer ARM (LON:ARM), a major beneficiary of Apple’s rise to prominence.

Morgan Stanley has cut its rating to ‘equal weight’ while bumping up its price target from 725p to 911p to take account of the share’s 45% rise over the last year.

It is not particularly worried about rumours that Apple is scaling back on orders for components of its iPhone 5, but it does believe that everything that could go right for ARM over the last 12 months pretty much has, and this is reflected in the share price.

“Everything we were hoping for 12 months ago is now taken for granted due to strong news flow, including the iPad mini launch, disappointing Ultrabook launch and weak PC sales. It will be difficult for news flow to improve from here, and ARM could still lose sockets here and there (Samsung Galaxy S4, for instance),” suggests Morgan Stanley.

The broker notes that the current price/earnings ratio (PER) is at about 44, which is at the high end of the ten-year range.

“While 12 months ago investors were worried about ARM’s position vs Intel, we believe the current share price implies a near perfect trajectory in ARM’s market share and royalty rate for the next two years,” Morgan Stanley argues.

Though it remains very impressed with the company, the advice to those not yet invested in ARM is to wait for a better entry price.

Potential share price catalysts, according to Morgan Stanley, include: Apple using ARM intellectual property in its personal computer (i.e. desktops & laptops, not tablets); Samsung switching back to Imagination Technologies (LON:IMG) for its graphics processing unit design; Intel’s new chief executive officer, whenever he or she is announced.

Investec is also now a holder, not a buyer, after the recent sharp increase in ARM’s share price.

It has raised its target price from 800p to 900p, having suggested in a research note in September last year that its royalty projections for ARM supported a 900p share price by 2016.

That price target assumed a number of things, including: a 90% share in the tablet market; a 20% share in the server market; Intel’s assault on the smartphone market failing to achieve market share above 10%.

“We see recent news flow cementing ARM’s likely success here, but for us to move beyond 900p requires upward moves in assumed chip volumes, royalty rates and stronger market share gains. While possible, we see it as too early to assume these as a base case,” Investec said.

As for Apple, rumours have been circulating that the company has cut in half its orders for iPhone 5 touch screens in the first quarter of 2013.

Japanese financial daily Nikkei reported that Apple’s order of 65mln iPhone 5 screens has been halved, citing sources from component suppliers. Apple’s touch screen providers are believed to be Sharp, LG Display and Japan Display.

Orders for other components have also been cut, suggesting that sales of the latest version of Apple’s cash cow have not been as buoyant as expected.



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September 11 2013

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