Arm Holdings (ARM +5.81%) and Tenable Holdings (TENB +8.54%) are technology companies that are market share leaders, but their stock prices have moved in opposite directions so far this year. Arm is up 140% in 2024, while Tenable is down 6.5%.
Is one a buy and the other worth ignoring? Stock price and recent movement can't tell you that, but looking at a stock's forward price-to-earnings ratio can help you determine if it is fairly valued. Arm's forward P/E sits at a staggering 119, one of the highest in its sector. Tenable's forward P/E is less than a third of that at 36.
Is Arm Holdings overvalued and Tenable a better technology investment? Let's get an understanding of the operations and financials of both companies to find out.
What do these two companies do?
Arm Holdings is in the semiconductor industry and licenses out intellectual property (IP) cores, which are generic semiconductor designs. Other companies build more complex designs on top of them to create cutting-edge chips.
In addition to licensing IP cores for central processing units (CPUs), Arm has a smaller graphics processing unit (GPU) business. Apple is one of its biggest customers. Nvidia, which mainly makes GPUs, is a smaller customer that recently entered the CPU business using Arm's technology.
NASDAQ: ARM
Key Data Points
Arm receives royalties from each chip shipped using its designs. For the fiscal year ending March 31, royalties made up about 56% of total revenue and notched an 8% year-over-year jump. The rest of the company's revenue came from licensing.
Tenable is in the cybersecurity industry. It provides cloud-based software that assesses and helps to reduce cybersecurity risk, but doesn't eliminate incoming threats itself. The software identifies and prioritizes areas for security improvement, which an organization must implement separately.
Tenable uses artificial intelligence (AI) and machine learning to constantly improve its recommendations. It generates revenue primarily through yearly subscriptions. As of the end of 2023, the company had 44,000 customers, which included 65% of Fortune 500 companies. The year included a 17% increase in revenue.
How sturdy are they?
Arm's revenue grew by 21% in the most recently completed fiscal year, moderately higher than Tenable's 17% growth. Impressively, Arm achieved this growth with total revenues of $3.2 billion, four times higher than Tenable's $800 million. Even more significant is that Arm grew its adjusted free cash flow by 50%, compared to a 37% year-over-year jump in unlevered free cash flow for Tenable.
Analysts predict that Arm will increase free cash flow per share by 97% by 2026, outpacing Tenable's projected 80% increase. Earnings-per-share estimates favor Tenable with 38% growth expected, versus 23% for Arm.
A big area of strength for Arm is in margins. The company boasts a gross profit margin of 95%, one of the highest in the technology sector. Tenable's sits at 77%.
Investors should also look at the competitive position of both companies. Arm is a dominant force in its market and has a monopoly on the chip market for mobile devices, with its licenses used in 99% of products. Out of all semiconductor companies, 75% reportedly use Arm's IP.
Arm recently unveiled its latest chip architecture: the Armv9 CPU. This chip increases performance and power efficiency to support the use of generative AI in smartphones. The royalty the company receives on each device sold is double that of its previous design, which should increase future margins.
Tenable is a market share leader in device vulnerability management. In 2022, the company ranked first for the fifth consecutive year, with 28.7% market share. It's a market leader, but not nearly as dominant as Arm. However, Tenable has the opportunity to increase its market share much more than Arm.
NASDAQ: TENB
Key Data Points
Are these stocks worth buying now?
Based on the financials and competitive positions, it's reasonable for Arm stock to have a higher valuation multiple than Tenable, but it is harder to justify the size of the difference.
Tenable has yet to achieve profitability, but it has made significant progress over the past year. The company decreased its net loss under generally accepted accounting principles (GAAP) from $92 million to $78 million last year. Once net income turns positive, the share price should benefit significantly, but there is a long way to go.
Arm is a great business, but it's hard to justify paying more than 100 times estimated earnings for any company. It seems like investors have priced Arm for perfection.
According to analysts, the average price target for Arm is $121, implying a downside of roughly 35%. The average price target for Tenable is $57, implying an upside of roughly 35%. Analysts aren't always right, but I think all this gives investors good reason to look more closely at Tenable right now.
