JP Morgan Downgrades ARM Holdings, Warns Consensus Doesn't Reflect Coming Slowdown

In a report published Monday, JP Morgan analyst Sandeep Deshpande downgraded the rating on

from Neutral to Underweight, while reducing the price target from 950p to 900p, saying the company may miss the consensus expectations due to decelerating end markets "as one moves into 2H15 and 2016." ARM Holdings gained in 1Q15 from a shift to 64 bit architecture, which has higher royalty rates. Although this benefit is expected to have continued in 2Q15, analyst Sandeep Deshpande pointed out that the smartphone and tablet markets had "perceptibly slowed" in the quarter. While ARM Holdings does not have direct exposure to the PC market, which too seems to have decelerated, the company is "indirectly exposed to this market through hard disk drives, printers, networking cards & WiFi chips," Deshpande wrote. In the report JP Morgan noted, "When faced with Samsung slowdown related inventory correction in 1H14, ARM reported royalty growth of only 8.2% in '14 vs. over 20% in previous years. Currently, the market is expecting royalty growth of 22% in US$ terms in 2H15 and 19% in '16." Deshpande believes that these growth rates would be "difficult to achieve" against the backdrop of a weak end market. "With key semi end markets such as smartphones, tablets and PCs (where ARM is exposed to multiple peripherals) slowing & consensus not reflecting the slowdown we downgrade to Underweight adjusting target price to 900p," the report added.