A couple of weeks ago, I told you to watch out for the earnings reports from ARM Holdings
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
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
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.