Could a short sqeeze explain the 30 per cent spike in the share price of chip designer ARM Holdings on Thursday?
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This chart from from Data Explorers suggest it might have played a part, once those Apple bid rumours started swirling around the market.
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As you can see from the graphic, there has been a marked increase in the amount of ARM stock being borrowed over the past couple of weeks.
This probably reflects a couple of things, according to traders:
Valuation – ARM trades on 2010 PE of 37 times, 8.7 times EV/sales and around 12 times book value.
Downturn fears – The Semicounductor Industry Association today forecast that worldwide chip sales would grow by 28.4 per cent to $290.5bn this year, by 6.3 per cent to $308.7bn next year, and by 2.9 per cent to $317.8bn in 2012.
Indeed, concerns of slowing growth was one of the reasons that prompted Janardan Menon to cut his rating on ARM to sell before this morning’s share price spike:
We estimate that this semiconductor cycle peaked in March 2010 at 58% YoY growth and entered into a downcycle from April when YoY growth dropped to 50%. This change in trajectory is entirely mathematical and is due to the extremely low base in Q1-09 and the strong subsequent recovery from Q2-09. However, in coming months we believe the cycle is likely to decline even more sharply as the industry sees an inventory correction.
Inventory levels have been moving up in the last two quarters, both at semiconductor vendors and their OEM customers. While not yet at alarming levels, production rates are currently extremely high with some amount of double ordering and extended lead times. Even in the face of a demand slowdown in certain end markets in Q2 such as automobiles and PCs, OEMs have continued to place strong orders on their semiconductor suppliers in anticipation of strong demand in 2H-10 and fear of further component shortages.
In this situation, if demand were to be weaker than expected into Q3, we believe it would trigger a bigger jump in inventory days and a resulting inventory correction. Given the macro-economic outlook and the current slowdown that we are already seeing in some areas, we believe such an outcome is likely. We expect semiconductor sales to run below normal seasonality in 2H-10 and for semiconductor companies to miss expectations
Yikes.
Related links:
Markets Live transcript 10 Jun 2010 - FT Alphaville