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ARM Holdings ARMHY Pitch to Hold

ARMHY Firm Summary. Founded 1990, IPO in 1998Increasing complexity of processor architecture has led to specializationARM is in the niche semiconductor IP subsector: they design and license semi-conductor intellectual property and also provide support, maintenance, software, and consulting.Their

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ARM Holdings ARMHY Pitch to Hold

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    1. ARM Holdings (ARMHY) Pitch to Hold

    2. ARMHY Firm Summary Founded 1990, IPO in 1998 Increasing complexity of processor architecture has led to specialization ARM is in the niche semiconductor IP subsector: they design and license semi-conductor intellectual property and also provide support, maintenance, software, and consulting. Their technology is used in >90% of the worlds mobile handsets They incur costs through R&D, then make money back on license revenue, royalty revenue, and applications They minimize their involvement in actually manufacturing and selling actual semi-conductor chips. Market Cap - $2.52B (vs. MIPS $195.80M)

    3. Porters Five Forces Buyer Power: -Relatively little buyer power from the consumers perspective, as they often buy the finished products, not the microprocessors themselves -Manufacturers have limited power as they may exercise discretion in choosing whom they partner with. Supplier Power: -Protection provided by patents -A high demand for microprocessors arise from technology used in cell phones and iPods, just to name a few.

    4. Porters Five Forces (cont.) Rivalry: -Currently little direct competition but industry titans like Intel and Toshiba have the capabilities to design these microprocessors as well. Threat of Substitutes: -Potentially many viable substitutes for microprocessors as a component for a marketable good. -Need to both be innovative and good at marketing to successful manufacturers.

    5. Porters Five Forces (cont.) Barriers to Entry: -Patents -High R&D costs, as sophisticated technology tends to evolve rather quickly.

    6. Strengths High market share 75% of all RISC processors Network effect - training High barriers to entry; high switching costs Licensing structure % of income from royalty increases with time No debt High brand equity

    7. Weaknesses Licensing structure ARMHY highly dependent on customers to generate revenue High up on supply chain: sensitive to many market forces Small number of high volume customers Dependent on third party support of ARM

    8. Opportunities Tied to rapidly growing microprocessor market Increasing competitiveness of microprocessor market is driving more manufacturers to outsource chip architecture development ARM is positioned well to capture emerging microprocessor markets High learning curve Network effects can mitigate adoption costs

    9. Threats Vulnerable to backwards integration by large chip manufacturers (Intel, TSMC, etc.)? Rapidly developing industry => ARM can be innovated out Intellectual property risks nonpayment unfavorable litigation outcomes Market acceptance is not assured

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