Peel Hunt initiates ARM Holdings at 'buy'

“We see a number of key growth segments going forward, as well as broader technology trends underpinning its strong position in the ecosystem,” said the brokerage.

“Simply we see ARM as an enabler of technology, in particular low power processing and, therefore, believe that ARM will continue to be a key player in the future, given the desire for more and more lower power products and their integration and adoption into mainstream consumer and business segments and processes.”

The brokerage sees three key drivers of growth and upside to its estimates for ARM: increased share in long-term growth markets, e.g. microcontrollers, smartcards, automotive and networking infrastructure; increased silicon content and, hence, revenue per smart device; and revenue from new technologies.

As far as the market is concerned, Peel noted that of the 65bn silicon chips manufactured in 2015, around 47bn contain a processor. By 2020, the value of this market is expected to grow to around c$150bn, it said, adding that ARM processor designs are in about a third of these chips, with about half of these in mobile devices.

Peel Hunt values ARM using a discounted cash flow approach, given the strong recurring free cash flow generated by the company from its licensing/royalty business model.

In addition, it argued there are no pure semiconductor IP companies with which it would compare ARM directly for a peer group multiples analysis.

At 1551 GMT, ARM shares were up 0.7% to 951p.