After rallying to top $50 briefly in May, enjoying year-to-date gains as high as 34%, shares of ARM Holdings (NASDAQ:ARMH) have pulled back dramatically and traded below $35 in June, giving up all of its gains for 2013 and then some. There have been two possible culprits contributing to the recent pessimism.
Intel (NASDAQ:INTC) recently scored a relatively high-profile win in Samsung's Galaxy Tab 3 10.1 with its Clover Trail Atom chip. The spot is among the most promising mobile design wins that Intel has claimed in recent years, with the vast majority of smartphones and tablets today still powered by ARM-based chips. Clover Trail chips make significant gains in power efficiency, an area where ARM has historically had the chip giant beat.
Last month, graphics specialist and ARM licensee NVIDIA (NASDAQ:NVDA) said it would begun licensing its Kepler GPU architecture to third-party chip makers, as well as future architectures. That could incrementally expand NVIDIA's reach into other mobile devices that aren't powered by its Tegra processors, and NVIDIA would compete directly with ARM's Mali GPU designs.
At least one Street analyst is unperturbed. UBS analyst Gareth Jenkins doesn't think the new developments pose credible threats to ARM's licensing business. Intel has made some progress expanding its mobile business, but the company still isn't powering any mainstream devices from the top two smartphone vendors, Apple and Samsung. Intel's advantages in manufacturing aren't necessarily translating into traction on the consumer level. Jenkins likewise doesn't see NVIDIA as a major threat immediately, saying that ARM will boost its efforts to leverage synergies offered by its CPU and GPU designs.
However, ARM has faced challenges with pairing its CPUs and GPUs at several key customers. Apple pairs ARM CPU cores with GPU cores from Imagination Technologies, and Qualcomm develops its own Adreno graphics to go along with its ARM-compatible Krait cores.
The analyst is sticking by his $44.25 price target, while boosting his rating to "buy" to reflect the pullback. Jenkins may be confident in ARM, but I still have concerns over the valuation and monetization.