Morgan Stanley Upgrades ARM Holdings To Overweight, Likes Long-Term Financials After iPhone 6

In a report published Tuesday, Morgan Stanley analyst Francois A Meunier upgraded the rating on ARM Holdings plc (ADR) ARMH from Equal-Weight to Overweight, while raising the price target from 980p to 1180p. ARM's royalty revenues are expected to peak at 36 percent in 2Q15 and decline thereafter as the positive impact from the strong iPhone upgrade cycle and v8 upgrade cycle fades out. In the report Morgan Stanley noted, "…we argue that even though growth is more like 15% for royalties, and 10% for the overall top line, the duration of the growth is longer than the market believes (or even tries to model), making ARM a good example of a compounding stock in tech and outside of tech." "Concerns around a slowdown of the smart phone market have created a buying opportunity for ARM. The stock is hardly up year to date, at the bottom of its 5 year PE trading range," analyst Francois Meunier pointed out. ARM's foray into new areas of autos, servers, networking and IoT are not comparable to the smartphone segment. "Not all new ARM initiatives will move the needle but every 1% of extra revenue growth adds 80p to the DCF," Meunier added. The company's future revenue growth is expected to be driven by an increase in its royalty rates with newer versions of v8, high operating leverage and compounding effect.
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