When Apple (AAPL +2.66%) announced its deal with China Mobile, plenty of semiconductor stocks levered to Apple's success went ahead and popped while others remained mostly flat to even slightly down. An example of a stock that popped nicely was Cirrus Logic is a mixed signal semiconductor company that – thanks to its massive exposure to Apple – lives and dies by Apple's success and failure. On the other hand, Qualcomm – which is levered to the smartphone market at large – actually finished down for the session. ARM Holdings (ARMH +0.00%) was one of those that popped a couple of percent when, really, it's tough to see how this is anything but a clear negative.
The flaws with the naive interpretation
The simplest and perhaps the most naïve interpretation here is that since ARM IP is found inside of Apple's iPhone, ARM should go up. Now, this is pretty ludicrous since the vast majority of smartphones, and certainly all high-end handsets, sport processors that bear royalties to ARM. In fact, while some may argue that since Apple's A7 is ARMv8 (i.e. 64-bit) compatible that sales of an iPhone 5s would be more beneficial to ARM from a royalty rate perspective than, say, a 32-bit Qualcomm Snapdragon 800 or a Samsung Exynos 5 Octa, there are some pretty serious flaws here.
First of all, the Apple A7 – 64-bits and all – sports only two ARMv8 processor cores, while chips from many other vendors, including Qualcomm, Samsung, and MediaTek often sport up to 8 cores (which means even more ARM content per chip) and even ARM graphics IP. Apple's A7 chip also uses graphics IP from Imagination Technologies, so it's unlikely that ARM will win that graphics socket in any subsequent iPhones.
So, aside from the A7 being 64-bit, a mix shift at the high end toward iPhones is probably a negative since each Apple phone contains much less ARM IP – at least on the big-ticket applications processor side of things – than many competing Android devices. Does this really justify a 2% move in shares of this already extremely richly valued stock?
This just goes to show that momentum is everything
For a story stock like ARM, anything that remotely resembles good news is going to send the shares soaring. While many will point to the nosebleed valuation as a reason to sell/short, this is just as naive as bulls buying because Apple is selling more phones. The stock will keep going up until either the macro environment becomes less favorable or until the story breaks. The only thing that could really do it at this point is visibly strong competition from Intel (similar to the Galaxy Tab 3 win about six months ago only on a larger scale), but that will still probably be several months off on the Android side of things.
Foolish bottom line
Is ARM a buy here? Well, it really depends. If the company can keep beating estimates, Intel fails to gain meaningful traction in mobile, and ARM's server push works out, then the shares may even be a buy here. However, there's a lot that could go wrong here to sour sentiment, particularly with the shares up over 1000% over the last 5 years. In a market in which valuation mattered, ARM would probably not be trading anywhere close to where it is today at over 100 times trailing twelve month earnings, but in a market where sentiment and the "story" is what matters, ARM could very well sustain these valuations for years.
