A String of Good News for ARM Holdings

 | Oct 12, 2013 | 2:30 PM EDT
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ARM Holdings (ARMH) is on a roll.

First, the company won a key slot in Apple's (AAPL) new iPhone 5s -- a 64-bit processor based on its design. As a result, ARM will earn $0.60 in royalties from every iPhone sale, up 20% from the prior rate.

Second, ARM has licensed the same 64-bit architecture to MediaTek, which has the biggest share of the China chip market for smartphones. MediaTek is the first designer of inexpensive systems on a chip for smartphones to license that technology. Considering that MediaTek is expected to record 48% of the Chinese market this year and more than 50% in 2014, ARM Holdings is looking at another big royalty boost.

Before either of these announcements came, Credit Suisse had projected that blended ARM Holdings' royalty rates would climb to 2% in 2015 from 1.5% in 2012. Earnings, Credit Suisse calculated, would grow by an annual compounded 25% from 212 to 2017.

Still, thanks to the debt-ceiling debate and government shutdown crisis in Washington, ARM depositary shares have lost 3.1% between Sept. 26 and Friday.

Moreover, I don't think this is the end of this string of good news (and higher royalties) for ARM Holdings. Apple's move to 64-bit technology -- and the move of China's handset makers to that technology -- will push Android-phone-makers outside of China to move to the new generation of 64-bit processors. That includes global market-share leader Samsung.

All of this is not good news for Qualcomm (QCOM) in the LTE market. According to CCS Insight, Qualcomm looks to continue dominating the LTE chip market in the near term, but it should suffer market-share losses to new products from Broadcom (BRCM), Intel (INTC) and MediaTek in the longer term.

Those new chips will continue lowering the cost of an entry-level smartphone from a well-known Chinese brand. At the moment, such a phone costs $240 without subsidies, CSS Insight estimates, but by the end of 2014 an LTE smartphone could cost as little as $160, with $135 in sight by 2015.

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