ARMH: Promise in Everything from Phones to Servers, Says Piper

Piper Jaffray‘s Gus Richard today reiterates an Overweight rating on shares of ARM Holdings (ARMH), and a $34 price target, writing that investors should note be worried about recent weakness in the smartphone market and how it could pressure ARM shares.

Writes Richard, “the annexation of CPU market share, in our view, is a durable and investable trend” as far as ARM is concerned. ARM is a formidable obstacle to Intel‘s (INTC) ambitions in the chip market, though Richard’s report does not assess Intel’s fortunes in light of his view on ARM.

Richard notes that 7.9 billion of the 10 billion chips sold last year using licensed CPU “cores” were paying royalties to ARM. He thinks a continued proliferation of chips with ARM licenses in different corners of the smartphone market will lead to compounded annual growth for ARM of 20% to 25% over the next five years.

As I wrote earlier today, some analysts, such as Goldman Sach‘s Simona Jankowski, have projected weaker-than-expected smartphone sales this year and next because macroeconomic stress that is leading to lower demand for the most sophisticated phones.

Against that, Richard posits a host of opportunities for ARM where its CPU designs are capturing segments of the chip market, from the simplest microcontrollers to servers:

We believe there will be tens of billions of things (Internet of Things) connected to the internet over the coming years. We expect the ARM architecture to dominate the IoT. Older 8-bit and16-bit microcontrollers do not have the performance to support connected devices [...] The Wintel hegemony is clearly faltering in the post-PC era, and we believe this will benefit ARM. Last week MSFT announced its own tablet based on an ARM architecture as well as an Intel-based tablet that will be twice the price and introduced 90 days after the ARMbased tablet. This is likely the first manifestation of MSFT’s branded hardware that is aimed at emulating Apple�s vertically integrated business model. It also is further evidence of the end of the Wintel paradigm which does not appear competitive with Apple�s model [...] We believe that Samsung, Calxeda, AMD, AMCC and TXN are working on ARM-based server chips. We believe Oracle, Dell and HP are working on ARM-based servers. We believe ARM customers are targeting the microserver market that addresses mega data centers built by companies like Facebook, Google, Amazon, EBay, Rackspace, Baidu, Tencent etc. Last week FSL announced its next generation QorIQ processor for networking infrastructure that will be based on a dual-Cortex-A7 processor or dual-Cortex-A15. These products are targeted at residential gateways, enterprise access points, smart energy systems, industrial communications, line cards and robotics. In this case, ARM is displacing PowerPC. As a leader in network processors, we think the partnership with FSL will help ARM penetrate the communications infrastructure market and help customers transition from legacy architectures to ARM.

Shares of ARM are down 68 cents, or almost 3%, at $23.07.