The Anglo File: ARM Races Ahead After Deal With Intel

Shares of ARM have logged solid gains since early 1998, and the Intel deal announced Monday should provide the company more strength.
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Even before Monday's announcement that

ARM Holdings

(ARMHY)

had signed a licensing deal with

Intel

(INTC) - Get Report

, owning a piece of the U.K. microprocessor chip designer was costly business. And after the euphoria that greeted the news, it will cost you, well, an arm and a leg, and some reckon that may be too high a price to pay.

ARM shares surged 15% following the news that Intel will license ARM's microprocessor designs to build chips for the next generation of handheld devices, such as phones and computers, but the rise in the company's shares is nothing new. Shares of the firm, which began life nine years ago in a barn outside the town of Cambridge, England, have risen more than seven times in the last 18 months on the back of 37 licensing agreements with such luminaries as

IBM

(IBM) - Get Report

,

Ericsson

(ERICY)

,

Nintendo

(NTDOY)

and

Psion

.

An ARM and a Leg
ARM's share action on the Nasdaq, from 4/98 to the present.

This string of high-profile deals has helped the company rack up astonishing earnings growth. According to a poll of brokers by

Hemmington Scott

, a U.K. financial information provider, ARM is expected to notch up earnings growth of 95.9% in 1999 and 25.3% in 2000.

With the shares closing in London Tuesday down 5.1% at 14.5 pounds (about $24), the company has a market cap of about 2.8 billion pounds and is set to join the benchmark

FTSE 100

index of leading companies before the end of the year.

Arming the World

ARM's goal is to have its technology become one of the

standards in the huge embedded-processor market. With the world's largest chipmaker deciding to extend its agreement to manufacture ARM-based microprocessors (Intel initially acquired the license to make ARM microprocessors when it bought

Digital Equipment's

chipmaking operations), it has gone some way to achieving this.

What makes ARM's technology so popular is that its designs offer high performance with low power consumption, and because the microprocessors use fewer transistors, they are cheaper to make for the firms that license the technology.

What Harm Could Come to ARM?

Yet with ARM now trading at a price-to-earnings ratio of 324 times, compared to 203 times at

Rambus

(RMBS) - Get Report

, which designs and licenses computer memory, there is little room for any disappointments. And already some murmurings of disquiet are being heard, albeit faintly, from some quarters. "ARM is basically a fantastic company with great fundamentals, but there are a few areas of concern," says one analyst who wished to remain anonymous.

What on earth could they be? "Competition, for one," says the analyst.

Although ARM dominates the 32-bit segment of the RISC, or reduced instruction set computing, processor market, the analyst says he has spoken to

Hitachi

(HIT)

and

MIPS Technologies

(MIPS)

, and they have both indicated that they intend to compete fiercely in this market. In fact, MIPS is already hawking its 32-bit technology at bargain prices in Japan.

Indeed, companies such as MIPS and Hitachi are much larger and more diversified than ARM, which still relies heavily on supplying the mobile phone market. Some 75% to 80% of ARM's sales this year are expected to be in the cellular market, of which 70% are with a single company,

Nokia

(NOK) - Get Report

. Should sales of handsets start to fall --

Paribas

, the European brokerage, predicts Nokia's handset sales will slow to 69% this year and 44% in 2000 from 90% growth last year -- the company's bottom line could be seriously affected.

Of course, ARM is a formidable player, and as the deal with Intel shows, it continues to sign up new customers at a rate of between four and six every year. Any drop in revenue from one quarter can be made up from a new source. And with the world's largest chipmaker as a customer, there is unlikely to be a shortage of people who will gladly bet a few body parts that ARM will continue to be armed and dangerous to its competition.

As originally published, this story contained errors. Please see

Corrections and Clarifications.