ARM Holdings reported strong third-quarter earnings and gave investors a solid, but not spectacular, fourth-quarter outlook that was relatively in line with our expectations. We will maintain our moat rating for ARM but may raise our fair value estimate by about 10%. Nonetheless, we still believe the company’s stock price reflects overly optimistic assumptions about long-term royalty growth, particularly from PCs and servers.

ARM’s revenue in the September quarter was GBP 184 million, up 8% sequentially and up 27% from the year-ago quarter. Processor licensing revenue was the highlight at GBP 68 million, up 20% sequentially as ARM struck a record 48 licensing deals with 24 different companies in the quarter.

MediaTek signed a significant licensing deal in the quarter, while AMD, Broadcom, and Huawei signed deals for ARM’s 64-bit IP for chips targeted for the server and network infrastructure markets. Processor royalty revenue was GBP 79 million, up 1% sequentially as the firm saw only a modest seasonal uptick in ARM-based chip sales in the June quarter. Chip unit shipments rose slightly to 2.5 billion units, but prices dipped slightly as the firm saw strong growth in higher-volume, lower-priced ARM-based microcontrollers. Nonetheless, ARM still earned a hearty 36% operating margin in the quarter.

For the December quarter, ARM expects revenue to be in line with Street estimates, which are currently $290 million. Sales at these levels would be up 3% sequentially but up 15% from the year-ago quarter. All in all, ARM continues to profit from the booming smartphone and tablet markets, especially at the low end among Chinese OEMs, while still gaining traction in enterprise and networking applications.

However, we still don’t see an attractive margin of safety for ARM’s stock price today, as revenue growth may be less than anticipated owing to the presence of Intel as a strong competitor in low-power PC and server processor designs.