ARM: Approach With Caution

CAMBRIDGE, U.K ( TheStreet) -- ARM Holdings ( ARMH), which reports its first-quarter results before market open on Wednesday, is set to maintain its status as the pacesetter for the semiconductor market. Analysts, though, are warning investors to approach with caution.

One of the leaders of the 2011 tech sector uptick, ARM's low-power chip technology has placed the company in the sweet spot of the smartphone and tablet boom. The British outfit has already amassed a host of big-name partners, which include Microsoft ( MSFT), IBM ( IBM), Nvidia ( NVDA) and LG Electronics.
British chipmaker ARM reports its first-quarter results on Wednesday before market open.

"The appeal of the ARM story is hard to deny; ubiquitous architecture, ramping handset complexity and new market penetration," explained Lee Simpson, an equity analyst at Jefferies, in a recent note. 'With the semis sector marked to grow mid single digits this year, we concur that ARM does look well positioned to outgrow the market."

Buoyed by this momentum, ARM's shares have climbed more than 161% over the last 12 months, compared to dips of 13% and 7%, respectively, at Intel ( INTC) and AMD ( AMD).

Simpson, however, thinks that investors should still approach ARM with caution, warning that the company's success is largely priced into its shares.

"We continue to view ARM's shares as over-valued," added Peter Knox, an analyst at Societe Generale, in a note. "Expectations for tablets and mobile computing look overdone to us."

ARM is also facing stiffer competition as other companies ramp up their mobile efforts. Intel, which is the world's largest chipmaker, recently launched its own tablet processor, code-named Oak Trail, and CEO Paul Otellini has vowed to offer tablet technology for the Windows, Android and MeeGo operating systems by the end of the year.

Intel is something of a laggard in the smartphone and tablet markets, although this did not stop the chip giant from posting stellar first-quarter results earlier this month. The robust spending environment noted by Intel, however, could actually bode well for ARM.

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"We believe Intel's recent comments are incrementally positive for ARM's market share in smartphones and tablets, with ARM maintaining more than 95% market share in 2012," explained Francois Meunier, an analyst at Morgan Stanley, in a recent note.

Analysts surveyed by Thomson Reuters are looking for ARM to report revenue of $173.79 million and earnings of 11 cents a share when the company posts its results on Wednesday, up from $143.3 million and 9.3 cents a share in the prior year's quarter.

Jefferies, which recently raised its ARM price target, expects the company to deliver revenue of $190.3 million. Sales are likely to include $105.6 million of royalties on 1.8 billion devices shipped and licensing revenue of $58.4 million, according to Simpson.

Investors will also be eager to weigh the impact of the Japanese earthquake on ARM's customers when the company posts its first-quarter numbers.

"Concerns over Japan-based disruptions to ARM's end-markets (we have recently trimmed our Q2 11 handset market forecast to 357m from 375m) are likely to be the main focus of these results," explained Societe Generale's Knox.

ARM's stock dipped 4 cents, or 0.13%, to $30.96 in late trades on Tuesday.

--Written by James Rogers in New York.

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