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ARM Holding Strong Despite One-Off Charges

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The share price of ARM Holdings (LSE:ARM) fell sharply today on the London Exchange after filing what I thought was a rather strong report for the final quarter of FY2013. The ARM share price dropped 7.85% to 857.00 approaching the final hour of trading.

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Is it just me, or does it seem like investors are overreacting to the slightest signs of negativity? See my earlier article today, “Randgold Slips on Investor Reaction to Inane Report,” and you will understand what I mean. Even whilst I was writing that story, I noticed that ARM shares were declining, despite a year-end report characterized as “good progress” by CEO Simon Segars. Just look at these numbers:

  • Fourth quarter revenues were up 15% from 2012
  • Fourth quarter processor royalty revenue gained 7% from 2012
  • Fourth quarter pre-tax profits were up 19% from 2012
  • Fourth quarter EPS has up 30% from 2012
  • Fourth quarter chip shipments, which drive the royalties, were up 16% from 2012

 

  • Full year royalty revenue grew 18 percentage points faster than the semiconductor sector average
  • A record 2.9 billion chips shipped by ARM partners in 2012
  • Full year double-digit revenue growth in every category except one.
  • Full year total revenue growth up 22% ($1117.7 million) compared to 2012

There are two things that have made investors nervous, the first of which is that these results are normalized, having removed from the accounting a one-time impairment charge of some £59.5 million. The catch is that the “normalized” accounting does not take into account that, or any other, one-time charge. Instead, it indicates a situation of “all things being equal,” and for very good reason. Normalization allows investors and stakeholders to ascertain the ongoing health of the company. Others would argue that you cannot deposit normalized numbers in the bank. Nonetheless, normalization keeps the nitty-gritty, here-and-now in proper perspective.

The second issue, as I see it, is  that too many people are needlessly anxious and fearful of anything negative. This does not bode well for either the market in general or the continued well-being of any company’s market capitalization. To wit, the nervous and the naysayers are predicting gloom and doom for ARM for various and sundry reasons, such as currently declining sales in high-end smartphones, which, of course, could have a deleterious effect on ARM’s chip design business, which itself accounts for more than 95% of the all the chips in all the smartphones in all the world.

The general negativity is dangerous. It positions investors with a poor perspective to the end that they are unable to see the positive signals, especially as markets and technology begin to move at a faster pace, making it difficult at best to value both near and long term potential. A little bit of research will reveal that ARM is still ahead of the curve in the development of technology and is ready to address new products and realities of which the general and investing public are still blissfully unaware. Not to mention that, despite the one-time impairment charge, ARM emerged from the failed deal with 500 new patents.

I submit that ARM knows better than anyone else what the smartphone market is and is not. Doesn’t it make sense that they also know where the next best opportunities lie? And doesn’t it make sense that they are prepared for those opportunities?

Think about it.

 

 

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