ARM Holdings plc (ADR) (ARMH) vs. Intel Corporation (INTC): The Calm Before the Storm

Shares of ARM Holdings plc (ADR) (NASDAQ:ARMH) swung wildly on the morning after its 2013 Q2 earnings report, released on July 24. At market open the stock spiked to about $42.80, only to settle back by the end of the day to about $39.60, a change of almost 7.5%. It was a classic case of investors being initially excited by the report, only to have second thoughts after they digested it.

ARM Holdings plc (ADR) (NASDAQ:ARMH) had played the usual tired old game of camouflaging bad financial news behind non-IFRS (International Financial Reporting Standards) numbers, referred to in ARM Holdings plc (ADR) (NASDAQ:ARMH)’s briefing charts as “normalized.” In this case, the bad news was a charge of $63.4 million to settle patent litigation against ARM Holdings plc (ADR) (NASDAQ:ARMH), which pretty much wiped out ARM Holdings plc (ADR) (NASDAQ:ARMH)’s operating income for the quarter, leaving just $19.6 million.

ARM Holdings plc (ADR) (NASDAQ:ARMH)’s year over year revenue growth was strong, however, at $264.3 million, up 24%. However, there are signs that ARM’s revenue growth, which is closely tied to ARM processor shipments through licensing, may be starting to slow, as the chart below shows.

After ARM’s 2012 Q4 earnings report, I made a couple of observations in my article “Does Arm Still Have Momentum?”, which bear repeating now that two quarters have gone by.

1) I observed that the surges in ARM’s share price in Q1 2011 and Q4 2012 correlated with announcements by Microsoft Corporation (NASDAQ:MSFT) of its Windows on ARM initiative at CES in January 2011 and the release of Windows RT, the version of Windows 8 that runs on ARM processors and Windows 8 Phone in October-November 2012. I inferred that investors expected Microsoft ARM devices to sell well and increase the demand for ARM processors. I also asserted, based on mostly circumstantial evidence at the time, that Microsoft Corporation (NASDAQ:MSFT)’s Windows on ARM initiatives would be disappointing and achieve little market share growth.

By now it’s apparent that Windows RT and Windows 8 Phone have not fueled a discernable acceleration in ARM processor shipments. According to IDC, 900,000 Surface tablets were sold in Q1, and some of these were Surface Pros with Intel Corporation (NASDAQ:INTC) processors. According to Gartner Reseach, about 6 million Windows Phones were shipped in Q1. Both numbers are relatively minuscule compared to total worldwide smartphone and tablet shipments in the quarter of 210 million and 49 million respectively.

2) I also observed that ARM and Intel Corporation (NASDAQ:INTC) were on a collision course in mobile devices as well as servers. Intel was preparing low power Intel Corporation (NASDAQ:INTC) processors that would compete in the tablet and phone space, while ARM was preparing more capable 64 bit processors to be used in low power servers.