LONDON -- Micro-chip designer ARM Holdings (LSE:ARM) (NASDAQ:ARMH) has long been a stock market darling. The huge rating that it traded on 10 years ago has been fully justified by its recent profitability.
Will buyers today be rewarded in the long term?
ARM has probably been the U.K.'s biggest beneficiary of the smartphone boom. In the last five years, its shares are up almost ninefold. In that time, dividends per share have more than doubled.
Its booming profits will be sure to attract competitors to its market. My concern is that, in the long term, shareholder returns could suffer as a consequence.
ARM currently trades on a 2013 price-to-earnings (P/E) ratio of 46.3 times expectations. The shares would fall hard from here if growth were to slow at any point in the next few years.
Investment shop-window Hargreaves Lansdown (LSE:HL) dominates the U.K. market. The company continues to exploit its first-mover advantage, yielding impressive returns for shareholders.
Hargreaves Lansdown has long been traded on a high P/E. That hasn't stopped the shares from making big returns. In the last five years, investors have seen their money increase almost fourfold. Dividends have risen at an even faster pace, reaching 15.8 pence per share in 2012 vs. 3 pence for 2007.
Hargreaves Lansdown's current P/E ratio is around twice that of the average FTSE 100 company. With earnings per share (EPS) growth of 16.7% expected in 2014, that now looks a little rich. There are also signs that competition is heating up since the launch of Charles Stanley's "Direct" service at the beginning of the year.
The investment case for ASOS (LSE:ASC) is simple: The company is blazing its way to becoming the world's leading online clothing retailer.
Just look at the most recent December trading statement. U.K. sales up 34%. U.S. sales up 53%. EU sales up 65%. ASOS managed to increase sales 37% in the quarter ending in February. By comparison, FTSE 100 peer NEXT reported a 3.1% sales increase with its most recent results.
ASOS trades on a P/E of 65.8 times consensus 2013 forecasts, vs. 13.2 times for NEXT. Despite that huge difference, NEXT still has a market cap more than double that of ASOS.
Not only does ASOS need to deliver, it also needs the rest of the industry to continue trailing it to justify today's price. That's a lot to assume.
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David O'Hara does not own shares of any companies mentioned. The Motley Fool owns shares of Hargreaves Lansdown. 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.