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Chip Designer ARM's Trajectory Shows Mobile Is Place To Be

ARM Holdings (ARMH), a barometer for the smartphone and tablet markets, saw its U.S. shares surge 4% to a longtime high Tuesday after reporting fourth-quarter sales and profit that beat expectations and guiding estimates for the current quarter higher.

The U.K.-based chip designer earned 20 cents a share, up 18% vs. Q4 2011 and a penny better than analysts expected. Sales rose 21% to $262.8 million vs. views for $237.3 million.

ARM's low-power chip designs dominate the market for smartphones and tablets, running devices from Apple (AAPL), Samsung and many others.

"ARM is at the epicenter of everything that's going on in mobile application computing," Benchmark analyst Gary Mobley said. It is the company benefiting most in the shift from PCs, a market led by chipmaker Intel (INTC), to mobile devices, he says.

While Intel has struggled in its attempts to move into chips for smartphones and tablets, ARM is showing early signs of success in moving into higher-performance markets such as PCs and servers. Eight chipmakers have licensed ARM technology for use in low-power servers or microservers, Mobley said.

ARM sees Q1 revenue of about $250 million. Analysts were modeling EPS of 20 cents, up 25%, on sales of $243.4 million. For the full year, Wall Street expects ARM to earn 86 cents, up 19%, on sales of $1.03 billion, up 13%.

ARM gets revenue from companies licensing its technology for developing new processors and from per-device royalties when actual products start to ship. In Q4, licensing revenue rose 26% and royalty revenue rose 21%.

In Q4, ARM received 36 processor licenses, from smartphones and mobile computers to medical devices and microcontrollers.

While ARM's business is showing strong growth, analysts are concerned about the company's valuation. The stock trades at 53 times its forward earnings, Mobley says.

"Based on traditional metrics, one would assume that it's expensive," he said.

Several other analysts voiced valuation concerns even as they praised ARM's technology.

Its shares rose 4.2% to 43.69, the best since March 2000. Since Apple hit a closing high on Sept. 19, the iPhone maker has dived 35%. ARM has leapt 54%.

"ARM enters 2013 with a robust opportunity pipeline for licensing and a record order backlog," CEO Warren East said in a statement. "Market share gains in long-term growth sectors look set to continue as our partners introduce new chips based on ARM technology.

The global economic climate is characterized by "uncertainty and the prospect for low growth for some time," East said. But if the situation doesn't deteriorate significantly, ARM's revenue for the full year should be "at least in line with current market expectations.

In recent months, many tech firms have announced details of ARM processor-based product developments. Samsung announced its Exynos 5 Octa chip, the world's first application processor to use ARM's Big-Little technology, which promises high performance with low power consumption.

Broadcom (BRCM) announced that it had licensed both the ARMv7 and ARMv8 architectures and intended to use the technology for a range of end markets, including set-top-boxes and broadband access chips.

Red Hat (RHT) and Applied Micro Circuits (AMCC) announced a collaboration around ARM's 64-bit technology for servers. Red Hat plans to make its server software available on Applied Micro's X-Gene Server-on-Chip design.

Of the 2.5 billion ARM-based chips shipped in Q4, 51% were for mobile devices, 28% for embedded systems, 16% for enterprise and 5% for home applications. ARM-based shipments were up 13% from a year earlier. Industrywide chip shipments were up just 2%.