Other than its valuation, there is a lot to like about ARM Holdings plc (NASDAQ:ARMH), but I do think the market may have lost its mind a little. There might still be significant upside after the market cools down a little. My ideal trade would be to sit back by writing some puts, and I either get in where I want it with the premium or I get paid to miss the chance.
If it rockets even more, I’ll have walked away losing nothing. I do not like to get into the prices I like, since it varies depending on your situation, but I would probably go around $38-$40 and choose my expiry based on the premiums, future catalysts, and previous price action. The initial draft of this article was written almost two months earlier, and ARM Holdings plc (NASDAQ:ARMH) has risen even higher since then.
With the trade and my tentative approach to ARM behind me, I would rather focus on its business and its future. I also would like to look at the larger market it helps facilitate, and the companies that benefit.
It is not clear to some people that every ARM-based chip is not necessarily made by the company. Apple designed its own processor for the A5 chip utilizing ARM Holdings plc (NASDAQ:ARMH)’s instruction set. Companies license the right to use the instruction set that ARM has, but they can develop their own chips.
Licensing is an interesting business model, because it can keep costs low and remove the need for large inventories. ARM does make its own processors, but that is not its entire business. The thing about license fees and royalties for ARM have translated into billions for a company like Apple, that uses an ARM-based processor, but ARM Holdings plc (NASDAQ:ARMH) probably only made millions from Apple. It is important not to forget the companies that benefit from ARM, because they might be making far more money.
Whodunit: NVIDIA with the ARM processor in the handheld device
NVIDIA Corporation (NASDAQ:NVDA)‘s Tegra chip system uses ARM processors. Speaking of Tegra, NVIDIA announced the Tegra 4, which will help the company continue to grow that product line. These will utilize ARM processors, so some of the benefit will go to ARM. That is the interesting thing about ARM Holdings plc (NASDAQ:ARMH). It has its success tied onto a ton of companies, but it really does not stand to lose much if a company that uses its processors or instruction set fails.
NVIDIA’s Project Shield is an interesting handheld console that will run Steam games, and who knows what else. It is a bit early to judge the product, but it will utilize the Tegra 4 chip. The company is using a flexible operating system. That flexibility makes me feel good about the device, because it is providing a platform only. That allows content to come to it, and if barriers to content are kept low, it will have a lot of it.
There are two ways of going about a hardware system. You can push quality concerns onto the developers, or you can act as the gatekeeper. Apple acts as the gatekeeper for quality and very lightly on content. It is not so black and white, but companies will choose different places on the spectrum. Steam tends to have low barriers, and I have played extremely buggy games on Steam before.
I think Shield is a good move for NVIDIA. The Tegra chip is already a success, and this will give NVIDIA its own product utilizing its component. Making a handheld device for gaming could help offset loss of revenue from the shrinking PC market, which could mean fewer GPUs sold.