3 Things to Love About ARM Holdings

LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to love about ARM Holdings  (LSE: ARM  ) (NASDAQ: ARMH  ) .

I'll also be asking whether these positive factors make this FTSE 100 technology titan a good investment today.

Brit tech
When we think of the big names in technology, we think of companies in the U.S. or Japan or maybe South Korea. But there's one FTSE 100 company -- the only real tech giant we have -- that proudly flies the flag for Britain.

ARM Holdings, which designs, licenses and receives royalties on microchips, has a market capitalization of over 15 billion pounds. In terms of ARM's global significance, it is sufficient to say that the company's low-powered chip designs are found in 95% of the world's smartphones.

Forecast beater
Time and again, ARM's results exceed analysts' expectations. It's been going on for years. If you Google "ARM" and "beats forecasts" you'll find pages and pages covering the past decade -- and earlier: In October 2000, the Telegraph was reporting that the company had just topped City forecasts for the 10th quarter in a row.

Once again, for the first quarter of 2013, ARM posted forecast-beating results. Revenue was up 28% and profits soared 58%. The company said, in that same April announcement, that it expected revenue for the full year "to be at least in line with current market expectations."

Margins
ARM's stranglehold on smartphones and strong position in other mobile and home markets make for great margins within the business. Furthermore, margins have been growing strongly over the past few years. The operating margin has stepped up in big strides: 18% (2009), 26% (2010), 30% (2011), and 36% (2012).

There's no better sight for shareholders than the combination of rapidly growing sales and expanding margins. In fact, ARM can be ranked as the number one FTSE 100 company, if measured on this virtuous combination.

A good investment?
You'd expect to pay a premium price for a premium business. And ARM is undoubtedly a premium business.

The broader Footsie market is trading on around 16 times forward earnings. How much of a premium over the average should you pay for a premium business? 20 times earnings? 25 times? How about 54 times? At a current share price of 1,090 pence, 54 times earnings is exactly what investors are paying for ARM today. That's extraordinarily high, even compared with the market's historically lofty rating of the company.

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  • Report this Comment On May 20, 2013, at 5:52 PM, Gainster wrote:

    Three things to hate about ARM:

    -ARM's net income is not generating enough free cash flow relative to net incom, actually the net income / cash flow ratio is increasing worringly fast:

    2009 0.479852709

    2010 0.623717476

    2011 0.809813735

    2012 1.408540472

    -ARM recently lost their only competitive advantage in the microprocessor market to Intel, which is energy efficiency and Intel is blazing ahead of them in a pace they'll never catch up with. All of those producing ARM's cores doesn't have access to 22 nm, FinFET's and multi point voltage variation like Intel. Further Intel targets all market segments where ARM is present, not only the smartphone segment.

    -ARM's R&D budget is decreasing relatively to Intel's and in absolute terms Intel's R&D is 37 times that of ARM. This means that ARM has no chance of catching up with Intel.

    ARM has done well in a market without much competition, but now Intel is entering the market with CPU's that are far superior in all aspects and a R&D that will send ARM further backwards. ARM stands to loose huge market shares in this fast changing market and then we should no longer look at the forward P/E that is in the 50's, but rather the trailing P/E that is in the 90's.

    So my conclusion is that the Brits are building a tech bubble of their own and sooner or later it's going to burst.

  • Report this Comment On May 21, 2013, at 9:22 PM, DavidPinsen wrote:

    If you like ARMH, but want a little downside protection on your shares, here are a couple of ways to hedge it: http://portfolioarmor.tumblr.com/post/51033535452/two-ways-t...

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