Can This Chip Champ Climb Any Higher?

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A couple of weeks ago, I told you to watch out for the earnings reports from ARM Holdings (Nasdaq: ARMH  ) and MIPS Technologies (Nasdaq: MIPS  ) . The MIPS report is still about a week away, but ARM's boat has already docked.

The processor technology developer behind pretty much every chip you'll find in today's smartphones and tablet computers, among other gadgets, saw sales rising 27% year over year in dollar terms (or 18% in pounds sterling), driving earnings 25% higher in terms of British currency. Nonplussed, Mr. Market sent ARM shares a few percent down across the past two days. That's pretty much in line with the tech-heavy NASDAQ at large today, so this report was sort of a non-event.

The stock has gained 84% over the past year and a staggering 415% on the past three as ARM-based chips have become ubiquitous in pockets and purses worldwide. MIPS is hoping to copy that growth curve as its competing technology makes its way into the very same high-growth markets, but it hasn't really happened yet.

As for ARM, the company has shifted focus and is increasingly signing processor-tech licenses for consumer electronics and enterprise uses as a complement to continuing demand in mobile gadgetry. For example, STMicroelectronics (NYSE: STM  ) is shipping ARM-based microcontrollers into industrial manufacturing control panels, and Mentor Graphics (Nasdaq: MENT  ) has optimized the Inflexion chip-design system to run on ARM's Mali graphics platform. And that's just the tip of the non-mobile iceberg.

That doesn't mean ARM is abandoning mobile business: indeed, the mobile industry accounted for 58% of unit shipments in the quarter. The opportunity in front of ARM remains very large as chip designers from NVIDIA (Nasdaq: NVDA  ) to Marvell Technologies (Nasdaq: MRVL  ) continue to seek out new end-markets and renew their ARM licenses for the long term. All those little royalty payments add up very quickly.

However, the stock is very expensive; ARM shares trade for about 90 times reported earnings, though they're a much more affordable 40 times trailing cash flows. That's not ideal, especially when you look at MIPS trading at 17 times earnings and about 14 times free cash flows.

Would you rather pay a premium for growth that has already happened to a large degree, or buy into future growth at a discount? Being a Rule Breaker at heart, I'm a much bigger MIPS fan than an ARM booster at this point. I'm rating both stocks "outperform" in our CAPS system, but I expect much greater returns from MIPS.

Swing by CAPS today to rate MIPS and ARM -- or any other stock that strikes your fancy. The wisdom of crowds makes us better investors, and your input matters.

Fool contributor and all-star CAPS player Anders Bylund holds no position in any of the companies discussed here. Motley Fool newsletter services have recommended buying shares of and writing puts on NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.

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  • Report this Comment On July 28, 2011, at 2:09 PM, JH2010 wrote:

    You can "expect much greater returns from MIPS" all you want but it's not gonna happen. Nobody is interested in MIPS - they have absolutely nothing going for them.

    After the earnings next week, it'll be down in the 4's...

  • Report this Comment On July 29, 2011, at 11:27 AM, ludwigbodmer wrote:

    Would that I were smarter, but am I wrong that Apple uses ARMH chips in every I-phone? It seems to me that the parabola of growth Apple has generated for this MUST HAVE product has 1 to 3 years of sustainable growth, especially if the Chinese fall in love with it. If that is true, then I will bet on Apple/ARMH. If that supposition is wrong please correct me.

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