Last week, Merrill Lynch admitted it had been wrong to hold an “underperform” rating on ARM the
In a note published last week (entitled “ARM Wrestling”) Merrill admit that they “… had underestimated the potential for royalty rates to increase … and the sheer pace of end market growth addressable by ARM’s customers … and failed to appreciate the impact of Microsoft selecting ARM’s designs as the basis for the next generation if its Windows software …”.
How did they get it so wrong and for so long? This is the inevitable outcome of using conventional financial and business analysis to attempt to pick the next winner in an increasingly unconventional world. This way of thinking also assumes that all businesses perform in a conventional way and will therefore perform broadly in line with market conditions rather than outperform or underperform.
However ARM is not a conventional business in the way it thinks and behaves. If we apply the Competitive Strength perspective we can see that ARM have achieved a Competitive Strength condition of Excellent and may even have progressed to Free. Quite simply this means they are able to do things that other businesses with weaker conditions of competitive strength cannot. In this case the outcomes are higher royalty levels, customers who have exceptional rates of end market growth, major breakthrough deals with the likes of Microsoft and so on.
Merrill’s conventional approach is trying to spot the golden eggs, which goose is likely to lay them, as well as where and when. The Competitive Strength perspective identifies which geese have the capability to lay golden eggs because, as the Competitive Strength research base shows, that is invariably what they do. Can you also spot which is likely to to be the short term and which the long term investment perspective?
In spite of Merrill’s wrong call the market as a whole appears to recognise what ARM were capable of, though how many of the investment decision makers involved really know why is still a question in our view.
Can ARM do now wrong? Well watch out for any conventional sounding statements from the company, any sense of complacency and that they feel they have cracked it (no pun on the egg theme intended) and have become unassailable. This can be a sign that the Competitive Strength condition, how they think and behave, is slipping towards the Comfortable condition, where they will become vulnerable to external forces.
What about Merrill? They have now upgraded their stance on ARM to “neutral”. This indicates they are still using conventional thinking and analysis and/or maybe “neutral” is about exciting as it gets at Merrill Lynch these days.
Exceeding Expectations is brought to you by Steve Goodman and Tony Ericson partners in Achievement Coaching International where we help businesses to learn different thinking to enable different actions that deliver the different results that Make a Big Difference.. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. We publish regular articles using a recent business/financial topic to highlight different perspectives and conclusions to those obtained by conventional thinking and techniques. You can read the other three blogs at "Business Bloop Award", "You're having a laugh ... seriously?" and "Capitalism or ... Common Sense".