I scream at my computer screen a lot. It’s something that I’m working on. However, when I saw the following – I couldn’t scream; I couldn’t yell; I was flummoxed.
10-Mar-11 08:08 ET
ARM Holdings drops 5% in overnight trading; hearing weakness attributed to comments out of JP Morgan saying the co is most at risk from poor non-iPad tablet sales (27.56)
ARM dominates the market in Application Processor sales to the smarthphone industry and is well positioned to do the same in tablets. So in theory, if the “gang that can’t shoot straight” (Research in Motion, Motorola, HP, Nokia, etc.) can’t get their act together in tablets – ARM will sell fewer processors to them in 2011. That makes sense, but will ARM will sell fewer processors overall? The market believed so and ripped 10% from ARM’s hide on Thursday. Considering that the only tablet maker that can shoot straight (Apple) is a customer – this rush to judgement may have been a little too soon.
Examining the call a little closer it appears that JP Morgan can’t shoot to straight either. Mark Moskowitz of JP Morgan had the following to say in January 2010 after the iPad was unveiled.
In our view, the iPad is a smart, nimble device for heavy content users – Apple’s core customer. iPad is a hybrid of sorts, marrying select benefits of the smartphone and notebook. We expect the market to be small at first, but the gamer and education verticals should construct a meaningful growth ramp longer term.
Apple went on to sell 9.5 million units in 2010. Not exactly a small market.
That being said, I have an issue with taking market projections in such a nascent industry to seriously. The Wall Street types have sophisticated models to make their projections, but here is how an MBA student would forecast the size of the tablet market in 2011.
The student would take the 9.5 million units Apple sold in 2010 and project it over 12 months. Thus, Apple would have sold 12.5 million over an entire year. Next, they would search the internet and find out that iPhone sales grew 245% between its first and second year. Considering this is a new category they may dial back the growth rate to 200%. So, their estimate for Apple 2011 iPad sales would be 37.5 million. Assuming Apple has a market share of 80%, one would expect 47 million tablets to be sold in 2011. The actual Wall Street consensus is 50 million. My point is that these estimates are nothing more than a SWAG (Scientific Wild Ass Guess).
In my opinion, if the 50 million unit number proves to be accurate and if the “gang that can’t shoot straight” can’t meet their allotment – Apple will fill the void. Now I realize that there are people that hate Apple and won’t buy anything that Apple makes. However, I refuse to believe that 20% of projected buyers of tablets in 2011 have that point of view. If the “gang” doesn’t provide viable alternatives many of those projected to buy non-Apple tablets will simply buy an iPad.
In other words, I don’t believe the market will shrink because the “gang” can’t get its act together. The smartphone market is a prefect example. The “gang” has been struggling since the release of the iPhone, but the overall market has grown not contracted.
The bottom line is the 10% haircut ARM Holdings took after this lame-ass analyst report was a gift. Buyers on Thursday’s close are already up 3.7%. ARM is in the sweet spot. They provide extremely high valued intellectual property that is not easily replaced with competing solutions. For this reason they are part of my “8 Ballers of Mobile” portfolio. I haven’t back tested the Lame-Ass Analyst Signal, but I am willing to bet that buying after one is more profitable than not.
Disclosure: Long Apple and ARM Holdings.