My readers tend to have a love/hate relationship with Louis Navellier. He seems like a nice enough guy when I’ve heard him speak or briefly met him at conferences, but he’s also a numbers guy who recommends a long list of stocks in his newsletters and rides quantitative trends like earnings surprises and stock momentum to pick growth stocks — so his system didn’t help anyone very much in 2008 when his Blue Chip Growth portfolio was crushed (along with mine, to be fair). And since each newsletter issue reportedly has a ton of stocks listed as buys, there’s been some argument from folks that he cherry picks his best ideas when marketing his newsletters.
Yes, cherry picking is a core competency of newsletter promoters — but at least it’s usually real, and when they do this they’re actually telling us about good ideas they had, so that’s something (even if they rarely mention the stocks that went down by 80%).
Our job, then, is to see what Navellier is calling his “Stock of the Next Decade” and decide for ourselves whether this will be one of the winners — and by “our” I really mean “your” … I’ll decide for my money, sure, but you decide for your money … fair enough?
This teaser comes in as an ad for Blue Chip Growth, which is probably Navellier’s biggest and most popular letter focusing, as you can probably guess, on large cap “safer” growth stocks (he has several newsletters, this one used to cost about $300/year and seems to be getting the price slashed of late, this offer is for $100 … some of the “premium” letters are up to $5,000 if anyone ever pays retail).
And yes, what’s teased is a bold, long-term promise: the “Stock of the Decade.” Worth finding out about, at least if we can do it for free, no?
Here’s how the ad opens:
“It already owns 90% of the smartphone and tablet market
“And it’s about to eat your lunch in PC chips next….
“If you missed out on the glory growth years of Wal-Mart, Microsoft, Coca-Cola Amazon, and McDonald’s you need to listen up.
“The key to creating legacy fortunes for their shareholders was to be the best at an indispensible or highly desirable product. The cheapest retailer. The operating system that runs 90% of all computers. The most liked and trusted soft drink. The most efficient and comprehensive online retailer. Our favorite fast-food joint.
“Create an advantage, build a moat around it to protect your dominance, and harvest the rewards. That’s how the fortunes of Gates, Bezos, Kroc and Walton were born.
“To create such a fortune today, you must piggy-back on the NEXT great success story.
It’s a company whose name you likely do not know, even though its computer chips appear in 90% of today’s most indispensible devices˜our smartphones.”
So that’s the basic pitch — that this company will follow those megacaps in creating a business that will dominate its market (and a stock that will dominate the stock market) for the next decade. And frankly, from even those relatively squishy clues we’ve seen so far some of you can probably guess who the company is … but good ol’ Louis supplies an abundance of other clues, hints, and tease-y bits, so let’s look through some more of ’em.
“… it designs the computer chips that run the fastest growing tech gadgets available˜smart phones like Blackberrys, Droids and iPhones, plus tablets like the iPad. If you cracked open your smartphone right now, it’s 90% certain you would find one of this company’s chips. And 95% certain if we’re talking about your tablet computer.
“Even better, the company is kicking off its next big growth phase by designing chips that will soon appear in other devices. It’s highly likely they’ll get to 90% dominance in those markets, too.
“Like digital TVs. They already have 35% of that market, up from 15% just 5 years ago.”
Sounds pretty good, right? This is, we’re told, a semiconductor chip designer — in Navellier’s words, the “best chip designer in the business.” Like many semiconductor companies, it doesn’t run the foundries and factories that churn out the chips — that’s why we hear so much about “fabless” semiconductor companies, those that design chips but use the massive capacity for churning out chips in Taiwan and elsewhere to actually make them.
But even beyond that, they don’t really even sell chips whose fabrication is outsourced — they’re just about licensing their designs and letting someone else do all the marketing, tweaking for individual products, etc … Navellier calls their products “recipes,” and their money comes in as royalties on any chip that uses their “recipe.”
And yes, we get another connection to a hot Apple product, a connection that seems to be pretty much required if you’re going to tease a tech supplier:
“The iPad2 is the perfect demonstration of this company’s excellence. Thanks to its latest design breakthrough, the iPad2 can perform functions twice as fast as the original iPad, with the same battery life.
“You really think Intel is going to catch up any time soon?”
And we get some numbers to bolster the case (and whet the appetite):
“Gross profit margins? An outrageous 93%!
Year-over-year earnings growth? 133%
Profit growth in the most recent quarter? 72%
“Debt? Absolutely zero!”
Makes sense that a company that just creates and sells designs and collects royalties would have huge profit margins … but still, impressive numbers, especially the growth numbers.”
And apparently they are actually going after Intel:
“In PCs, they just locked up an agreement with Microsoft for the next generation of Windows to run on their chip designs.
“Boom! With one fell swoop, Intel has to be running scared. Analysts are already forecasting they’ll capture 25-35% of the entire PC chip market, and I think they’re too low.
“Remember, chip efficiency is hugely important in a world where energy is getting more costly.”
And we get some specifics about their business performance for 2010:
“743 licensees shipped 6.1 billion chips based on this company’s designs….
“91 new [licensees] in 2010.”
And the stock is down slightly, which Navellier thinks is an opportunity:
“The stock grew 138% in the last 12 months, but investors spooked by Japanese earthquakes and Middle East oil disruptions are putting this gem of a company on the “for sale” shelf, just for you.
“But the sale pricing won’t last for long.”
So what is our little secret “stock of the decade?” This one ain’t too tough, we don’t even have to plug in the Thinkolator to tell you that this is …
Arm Holdings (ARMH)
Arm is indeed a designer of chips and holder of patented designs — they’ve been around for decades, with some attempts to compete with Intel in the market for PC chips but a more proven expertise in relatively simple, lower power chips for things like cell phones, appliances, etc.
And Apple is reportedly a licensee of Arm for many of their devices, including the iPad — they apparently designed a new chip for the iPad that uses an Arm processor when the product first came out, and in the new iPad 2 they’ve now upgraded that to a dual core processor that most folks still seem to think is based on an Arm design (and therefore gets them a royalty).
This is also one of the top-performing large stocks from last year, thanks in part to the increasing focus on mobile device growth and the enthusiasm for the new iPhone and the iPad — and it has certainly been teased before more than once, the most recent time it graced these pages was courtesy of Patrick Cox back in November when he pitched this as a way to earn “mobile royalties.”
As for whether Intel (INTC) is quaking in their boots, well, I don’t necessarily see this as an “either or” — INTC is cheap and huge, ARMH is expensive and about a tenth the size, and Intel is also a licensee of ARMH designs. It’s true that Intel has been somewhat stymied in their efforts to build a bigger business in chips for mobile devices, their Atom chip hasn’t caught on for phones or tablets as they would probably have hoped, and they’ve lost some talent in that division lately and all of the current tablet designs apparently use some sort of ARMH-licensed chip, so INTC is certainly not the play on tablets or mobile phones that ARMH is right now.
At the same time, ARMH is not a play on just Apple products (or on the oft-rumored takeover of ARMH by Apple) but on the increasing size of the markets for mobile devices in general — they get a tiny royalty on each device sold with their designs inside, so it might even be better for ARMH if the world was awash in inexpensive tablets and cell phones instead of obsessed with the iPad and iPhone. Indeed, part of the reason for ARMH shares being down a bit, according to Eric Savitz, at least, is some fear that the iPad 2 will own the market and that there will be a glut of non-Apple tablets that can’t be sold.
And yes, though they are trying to compete with Intel now for next generation low-power laptops and other windows devices, I wouldn’t necessarily bet against Intel in their core business — that strategy hasn’t worked well for anyone else so far. And it goes both ways, Intel may well continue to have trouble competing with Arm in the mobile space.
There are other plays that are similar to ARMH in some ways — MIPS Technologies (MIPS) is a far smaller company in the same basic business (RISC processors), and we often also hear about InterDigital (IDCC), which is a patent holder in mobile, or about Qualcomm (QCOM) and their strong position in some phone chip designs, but ARMH does stand out a as a pretty unique play on the very basic building block of low-power computers. And as befits a well-recognized leader, their stock looks very pricey on the basic metrics: trailing PE of 80, forward estimated PE of 40, and, thanks to analyst estimates for forward growth that are far lower than the current year’s earnings growth, a very high Price/Earnings/Growth ratio of about 3.5 (if you’re a Peter Lynch follower, you look for a PE of 1 or below — meaning that the expected growth rate is at least as high as the PE ratio).
ARMH at this valuation arguably needs the tablet computer to take over from the laptop on a grand scale over the next few years, or for more advanced mobile devices to come out using their architecture and paying higher royalties … which probably means more than just the iPad being a hit, and definitely means that the tablet market better not fizzle or hit a ceiling in a year or two … or adopt a different chip architecture (though the relative low cost of Arm’s designs, on a royalty basis, probably turn off base-level competition like that).
Arm does boast great gross profit margins, and a very sticky customer base (once you’ve committed to a chip architecture, it’s expensive to change course), but the industry is changing quickly and they also spend a lot on R&D (34% of revenue) and selling and general admin expenses (33%), so it’s not like they’re pushing that 90% gross profit margin down to the bottom line — and with Intel trying to eat into their business by cutting the power consumption of their own chip designs, ARMH can’t just sit back and cut research spending.
You’ll be unsurprised to hear that growth stock folks tend to love Arm, including Navellier, of course, and that value folks are scared to death of ’em — the Morningstar analysts pegs the shares with a fair value at $21 and wouldn’t buy until it got close to $10, while Navellier clearly thinks the stock will continue skyward from here (it’s at about $26 now). So which camp appeals to you? Overpriced stock, or underappreciated industry leader? Somewhere inbetween? Let us know with a comment below.