ARM Holdings overvalued while over 750p, Bernstein says

The headwinds in the smartphone market in 2016, combined with slower royalty growth and the waning boost from the v8 product cycle, all meant that ARM Holdings current valuation multiples would come under pressure, broker Bernstein said.

Royalty growth was set to slow towards approximately 17% in 2016, analysts Pierre Ferragu, Matthew Morrison and Rolf Bulk said in a research note sent to clients.

In the same note they downgraded their recommendation on the chip-designer’s shares to from ‘market-perform’ to ‘underperform’ and their target price from 800p to 760p.

Together with a spike in operating expenditures, the above meant analysts could be expected to mark down their estimates for earnings per share this year.

With EPS set to grow by less than 10% and only the prospect of a slowdown ahead, “a ~30x forward price-to-earnings is unlikely to weather such a set up and we downgrade the stock to underperform,” they said.

Nonetheless, 2016/2017 was set to mark the “last leg” in the de-rating cycle for ARM’s stock, with the P/E multiple expected to stabilise in the low-twenties, Bernstein said.

“That could put ARM in a position to deliver 2%+ dividend yield in 2018, were the company to prop up its distribution ratio to 50%. This means we feel the stock will remain overvalued as long as it stands above the ~750p mark.”