During the shortened trading week, the Dow Jones Industrial Average (DJINDICES:^DJI) rose 217 points, topping the 17,000 mark. In tech, ARM Holdings (NASDAQ:ARMH) and one of its key manufacturing partners, Taiwan Semiconductor (NYSE:TSM), brace for the positive impact that Apple's (NASDAQ:AAPL) iPhone 6 launch will have on both of their respective businesses. Separately, GoPro (NASDAQ:GPRO) pulled back.
ARM Holdings and the "waterfall" effect
ARM Holdings licenses processor and/or instruction set architecture IP to most of the mobile chip players, and Apple is probably one of ARM's best-known clients. As a quick reminder, ARM is typically paid an upfront licensing fee for its processor and architectural intellectual propertu and then paid recurring royalties as chips that contain ARM's IP sell-through.
ARM is likely to benefit both from the transition from the A7 to the A8 in Apple's next-generation iPhone 6, as well as from the waterfall of the 64-bit A7 processor to the mid-range iPhones. The A7 will replace 32-bit chips in the mid-range devices, and as a result, much more of Apple's volume will yield higher royalty rates (since ARM charges more for 64-bit chips than it does for 32-bit ones). This, combined with a slightly higher selling price of the A8 for royalty purposes, means that ARM is set to benefit nicely from the iPhone 6 rollout.
Keep in mind, though, that ARM trades for over 30 times fiscal 2015 estimates, so there is probably a good deal of optimism baked into the shares already.
Taiwan Semiconductor gets a big new client
On a related note, shares of Taiwan Semiconductor have been doing quite well lately, driven by both strong 28-nanometer utilization rates as well as optimism surrounding the company's upcoming 20-nanometer ramp. It is a poorly kept secret that TSMC will be building most, if not all, of Apple's next-generation A-series processors.
In fact, JPMorgan Chase upped its Q3 estimates for the chip manufacturing giant on expectations that TSMC will beat consensus thanks to Apple's business, as well as 20-nanometer orders from other clients such as Qualcomm and Xilinx.
The Apple business is significant as well as new for TSMC and could eventually add several billion dollars' worth of leading-edge business on the top line. Further, as Apple waterfalls last-generation processors to older and cheaper phones, Taiwan Semiconductor stands to gain additional share at Apple over the long run.
GoPro coming back to Earth?
Following an extremely successful IPO, after which shares more than doubled from the initial offering price, shares of GoPro pulled back from nearly $50 per share reached early in the week to close at $41.58 by the end of Thursday's shortened trading session.
While a $5 billion valuation can be justified if investors assume that GoPro is on track to nearly triple its net income from current levels, there are a lot of uncertainties here. Further, even if the stock were to eventually grow into its valuation, it's hard to see how the company will combat the eventual risk to its mid-30% gross margin levels -- quite high for a product with a fairly low technical barrier to entry.
GoPro appears to be a good company, but with competitive and margin risks looming, and with the post-IPO valuation apparently baking in a lot of future success, it's tough to get too excited about the shares anywhere north of $40 each.