ARM Holdings (NASDAQ: ARMH) has experienced tremendous growth over the past decade as chips built on the ARM architecture have dominated the mobile market, powering the vast majority of smartphones and tablets. ARM's business model of designing and licensing its chips, as well as its architecture, instead of selling chips directly, has led to extremely high margins, and the company has plenty of growth opportunities available going forward. With that in mind, let's look at three key numbers that ARM investors need to know.
ARM chips are found in a wide variety of products beyond smartphones and tablets. During 2014, 12 billion ARM-based chips shipped, and over the past five years, this number has grown at an astounding 20% compounded annual growth rate.
ARM generally receives a royalty for each chip sold based on the chip price, so all chips aren't created equal. ARM receives far more for each high-end apps processor, shipped in a flagship smartphone or tablet, than a chip that powers a cheap feature phone, so the absolute number of chips shipped needs to be considered in context.
Still, ARM's dominance in many of its markets is impressive. The company has an 85% share of the apps processor market, a 65% share of the computer peripheral s market, a 90% share of the hard-disk and SSD market, and a 95% share of the automotive apps processor market.
Since 2007, the company has grown its overall market share in all of the markets in which it competes from 17% to 37%. Revenue has more than tripled during that time, buoyed by the explosive growth of the smartphone market. Going forward, while revenue growth may not be quite as impressive as in the past, ARM has plenty of opportunities to grow.
Mobile devices represent a very important market for ARM. In 2014, ARM estimates that the total addressable market for its smartphone, tablet, and laptop chips was $15 billion. By 2020, the company expects this addressable market to grow to $25 billion, with the total number of apps processors shipped expected to reach 2.8 billion, up from 1.8 billion in 2014.
Along with a growing number of devices driving increased royalty revenue, ARM also expects to grow the royalty payment it receives per device. More advanced technology, such as ARM's newer ARMv8-A architecture, commands higher royalty payments, and additional chips for connectivity and sensors can boost royalties as well, particularly for higher-end devices.
By 2020, ARM expects premium smartphones to deliver 20 times the royalty that ARM receives for a voice-only phone. The apps processor itself will deliver about 12 times the voice-only royalty payment, with the rest coming from connectivity chips and sensors. And in addition to smartphones and tablets, ARM expects 250 million laptops and 2-in-1 devices to be powered by ARM chips by 2020, delivering five to 20 times the voice-only royalty each.
The growth of the number of mobile devices, along with the potential to increase the royalty per device, gives ARM the ability to continue to grow its royalty revenue rapidly in the coming years.
In 2014, ARM was essentially nonexistent in the server-chip market. Intel is completely dominant in the data center, and it won't be an easy task for ARM-based chips to gain a meaningful foothold.
Despite the odds stacked against it, ARM expects to hold a 20% share of the server chip market by 2020. ARM is starting to gain some traction; Lenovo is building a prototype ARM server, and Hewlett-Packard began shipping 64-bit ARM servers last year. Payment processor PayPal also recently announced that it had deployed ARM servers, although the scope of the deployment was left unspecified.
Server chips represent one of the largest royalty-per-chip opportunities for ARM, which will make up for the low volume compared with the apps processor market. If ARM can manage to steal away a significant amount of market share from Intel over the next five years, it would probably provide a very meaningful source of revenue growth. But there are no guarantees, and Intel will certainly take steps to prevent ARM from encroaching on its very profitable data-center business.
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Timothy Green has no position in any stocks mentioned.