One Stock to Short

This article is part of our Rising Stars Portfolios Series.

In this video, Fool analyst Eric Bleeker discusses one of the companies on his short watchlist: Britain's Imagination Technologies, which has found tremendous success licensing technology used to create graphics processors in mobile devices. Imagination has dominated the mobile graphics niche, licensing its designs to a powerful group of companies including Apple (Nasdaq: AAPL  ) , Samsung, Texas Instruments (NYSE: TXN  ) , and Motorola (NYSE: MOT  ) . But now, an up-and-coming rival threatens to steal its thunder.

In the complex field of mobile chipmaking, investors might be more familiar with ARM Holdings (Nasdaq: ARMH  ) . It follows a similar model to Imagination Technologies, but until recently, it's focused instead on the central processor at the core of mobile devices. However, ARM is now getting more aggressive in graphics, releasing its new "Mali" GPU, which represents a significant improvement over its previous graphics efforts. Perhaps more tellingly, ARM included support for programming that allows any software (not just games) to make better use of the graphics processor.

While Intel's (Nasdaq: INTC  ) difficulties in unseating NVIDIA (Nasdaq: NVDA  ) point to the difficulty in transitioning from central processors to the very specialized world of graphics processors, ARM's embrace of graphics for general computing show that it's taking a different route from Intel's failed attempts to crack the graphics market. Imagination Technologies might have a technology lead now, but ARM's leadership position in the mobile world should allow it to steal customers as it closes the technology gap with Imagination.

Bleeker's not opening a short position in Imagination at this time; he wants to continue learning more about the company's technologies and position. Also, Imagination's share price has recently gotten clobbered after reports surfaced that Samsung favored ARM's next-generation graphics processor instead. However, he's keeping Imagination on his watchlist for now, and suggests investors do the same.

See why Bleeker thinks Imagination might eventually make a good short:

Eric Bleeker owns shares of NVIDIA. Intel is a Motley Fool Inside Value pick. Apple and NVIDIA are Motley Fool Stock Advisor recommendations. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Apple and Texas Instruments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

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  • Report this Comment On November 17, 2010, at 2:28 PM, ibankingcrooks wrote:

    Of all the stocks to short, I can't see how this one would be a good one. They are in one of the only exciting, fast growing markets in IT - smart phones. Furthermore, IMG licenses to Intel, in their Z-series Atom processors, is inside the Apple A-4, where its un-likely to get displaced due to Apple's large interest in IMG. It's also the only good GPU option for MIPS architecture. Furthermore, just because they lost Samsung (who is super cost sensitive) does not mean they will loose OMAP with TI, or any other major chip manuf. IMG also has the PowerVR 6 series, and their multi-core options - which are not even in chips yet, and will likely do very well in performance versus Mali.

    So a short??? Come on. After losing almost 30% of its value in the last week, I can't see how this one is anything but a buy or at least a hold.

  • Report this Comment On November 17, 2010, at 6:50 PM, TMFRhino wrote:

    Well first, I didn't advocate opening a short on it - in large part because of the recent fall. I said its a good watchlist company for the time being.

    Second, they might have added to it, but the last figure I have on Apple is 3.6% of the company. For a company like Apple that has an intense focus on quality, that's not enough to deter them from switching if PowerVR isn't giving them an advantage.

    Third, MIPS brings in $78 mil a year in revenue, IMO having a GPU-licensing component in that architecture isn't enough to change a thesis on the broader competitive dynamic. That's interesting though, I'll have to look more into this. Seems like with the market MIPS is targeting, a GPU wouldn't be as important. Obviously, I could be off base with that though.

    Fourth, when a company is trading at P/E's north of 50, I want better positioning than "Samsung is more price sensitive" to assure me others won't pull out. I'll take ARM trading at a similar level, most the major processor companies have far more invested in designs around their chips.

    Again, I'm watchlisting it to learn more about the chance of a buyout, the overall technology, and because its dropped quite a bit recently. However, long-term, I don't like the position one bit. So yeah... I'll stick with the short side, not the kind of company I'd want to buy.

    Fool on!

    Eric

  • Report this Comment On November 18, 2010, at 11:37 AM, ibankingcrooks wrote:

    I understand your view point and thanks for the comment.

    The fact that ARM is obviously negotiating hard with a combined traditional IP core + Mali, means that Apple is even less likely to use the "standard" ARM GPU option. As you probably are well aware, Apple bought both PA Semi and Intrinsity over the last few years. By buying Intrinsity they got both an ARM architectural license and got great talent, which in fact had developed Hummingbird, the newest chip used in Samsung Android devices.

    http://www.iii.co.uk/investment/detail/?display=discussion&a...

    So... the last thing Apple would do is go back to building a pure-ARM platform, using the 'vanilla' Mali offering - irregardless of the pricing. Besides - they have the architectural license anyway - which in volume. It has also come up, around here in Austin, that ARM is shopping for another fab for their A-4 - currently still being stamped by Samsung. This is probably in an effort to have newer processes quicker than Samsung. They did have talks with Global Foundry and others… (no, I do not work for any of the company's involved here - and would not be speaking if I did)

    Of course, my assumption is Powervr SGX 543 and PowervVR 6 will be better than Mali. Orion from Samsung is a multicore Mali 400 implementation. Powervr5 can also be designed multi-core, and Powervr6 will as well. Chips with this type IP in them have yet to arrive... But I am assuming it is better - and could be wrong. ARM has Mali from its acquisition of Falanx in '06.

    http://www.arm.com/about/newsroom/13706.php

  • Report this Comment On November 18, 2010, at 12:59 PM, TMFRhino wrote:

    Hey ibankingcrooks,

    Thanks for all the information, I have to admit, I'm still working through a lot of blind spots in this area, so it's nice to be able to get some feedback from you as you seem especially knowledgeable in this area.

    Wouldn't an Apple microarchitecture license apply to further refinement of Mali past a "pure vanilla" state? Just trying to think through the whole Apple side of things, and what backwards from a "what could go wrong" type of scenario.

    Also, I notice in your CAPS profile you've got a thumbs up on MIPS, but not ARM, care to elaborate on that? I was discussing the ARM vs. MIPS play today with a co-worker and we were a bit at odds. I'd love to hear what you have to say.

    Best,

    Eric Bleeker

  • Report this Comment On November 19, 2010, at 5:43 PM, ibankingcrooks wrote:

    Eric:

    All good questions...

    I am not sure of the details of their license arrangement, and would imagine its quite secret. In my opinion, Mali is most likely to be adopted by those teams who want as much work accomplished by the ARM IP as possible. So if ARM can present a workable solution (reference designs, or even hard macros), including GPU integration with Mali, and also bring deeper discounts if both technologies are used - then adoption with players who are cost sensitive will be high.

    What I really think happened at Samsung, is their Hummingbird design and IP all went with Intrinsity, and they basically HAD to switch Mali and the ARM IP, if they wanted to get a design out fast. But thats just a guess...

    Designing a GPU is a very complex task- something Apple is not even up to. The IP that both Mali and PowerVR present has years of work in it - and patents. Both technologies are tile-based deferred rendering (TBDR) which is generally accepted to be better in terms of power efficiency. This defers - for instance - with the NVidia Tegra processor, which is built (if I am not mistaken) on GeForce technology. Anyway - you can dig around on all that in forums like http://forum.beyond3d.com/archive/index.php/t-58983.html

    But Apple has the volumes and design teams to do this. So, if Imagination can present superior technology, then it would seem logical they would choose it.

    caps, yes - I need to update that, I have re-bought ARM now that it has dipped recently. Very bullish on it.

    MIPS is a long term play in my opinion - but with some short-term upside also. They are going to benefit from LTE and other 4G b/c their cores are in a bunch of base-band processors. They also, long term, could benefit from the influx of all these phone/tablet/similar size devices. Android has been ported to MIPS, and they are making a really strong effort to get in with it. That will take them 2-3 years - but I think its possible. MIPS also just has a ton of upside in my opinion with such small market cap. They also are small enough to get bought. (all this talk of ARM getting bought I think is ridiculous)

    And, if you ask me, Intel and the PC industry is the big loser here. I think it's funny to see all these articles on how Intel is going to over take ARM. People just don't get the designer side of things... An SoC presents such a huge cost savings. And if a eng. looks at the TI, Samsung, NXP, Qualcomm, etc options - there are hundreds of SoCs to choose from. How could Intel compete with that? So what if their process is always newer. They would loose no matter - they can't create that many types of chips, in the volumes required, to keep hitting that margins they have. No way. :)

    Unfortunately - despite the fact I went and got a grad biz degree - I just don't have the patience to analyze the reports much. So this is where you guys always get me :)

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