It's not often that a stock trading at nearly 100 times trailing earnings makes for an attractive investment opportunity, but Fools need to be ready to play the contrarian when the situation presents itself. ARM Holdings
It shouldn't be news to anyone that smartphone market growth has been downright Malthusian -- smartphones outsold PCs for the first time ever in Q4 2010, with 100.9 million units shipped vs. 92.1 million PCs. That's an 87% increase in handheld sales over the previous year. Add to that the projection that smartphone sales may top 500 million units in 2011 (up from around 270 million in 2010), and the picture of the importance of this fast-growing market becomes clear.
ARM recently struck a wide-ranging licensing deal with mobile-chip behemoth Broadcom
Couple this with news that the next generation of Microsoft
As production expands and ARM licenses more of its chip blueprints to a market that is designing more software built on that chip architecture, ARM's 21% net profit margin could potentially skyrocket because of the increased volume and virtuous cycle. Remember, as an intellectual-property company, the more licenses ARM sells, the more handsome the return on its R&D investments, and, more importantly, the more incentive companies that have built OSes on those chip designs have to keep ARM in the game for the long run. We saw it with Intel on PCs, and it looks like history is repeating; we will see it with smartphones.
Technology is a rapidly changing industry, and therefore a risky one. Although ARM has yet to rebound to its pre-tech-bubble highs, it is a company that has demonstrated keen resilience in the last decade -- one for which value must be measured by its future potential in a sector that is experiencing serious growth.
More on ARM:
Fool contributor Jeff Saginor does not own shares in any of the companies mentioned in this story. Microsoft is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor pick. The Fool has written puts on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Microsoft, and Texas Instruments. Intel is a Motley Fool Inside Value recommendation. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a diagonal call position on Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.