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Give ARM a Hand

By W.D. Crotty – Updated Nov 16, 2016 at 12:53PM

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The market snubs it, but ARM Holdings continues to perform.

Twice a Motley Fool Stock Advisor recommendation, semiconductor intellectual property firm ARM Holdings (NASDAQ:ARMHY) reported interesting second-quarter results today.

Compared to last year's second quarter, revenue was up 21% to $105.5 million. However, that still fell short of analysts' $108.6 million estimate. Earnings jumped from 3.8 cents to 5.6 cents a share (factoring out acquisition-related charges from the most recent quarter's results), within the $0.06 per share analysts expected.

The operating margin was strong at 31.8%, and the company, after initiating a dividend in 2004, announced a share buyback program today.

However, one bit of bad news seemed to foil investors' expectations, perhaps accounting for today's 2.5% drop in share price. The company announced that it expects revenue to increase 15% to 20% this year. As recently as January, ARM was calling for 2005 revenue growth of at least 20%.

ARM is an interesting stock for two reasons. It has a solid and growing base of licensees such as Intel (NASDAQ:INTC) and TexasInstruments (NYSE:TXN). Its royalty-based business model is very similar to Qualcomm's (NASDAQ:QCOM), with one exceedingly big difference. Qualcomm, which analysts expect to grow earnings at 20% each year for the next five years, sells for 31.8 times expected 2005 earnings. ARM, which is expected to grow earnings 22.5% per year for the five years, sells for 28.7 times expected 2005 earnings.

Is ARM the Rodney Dangerfield of the semiconductor world, perpetually unable to get respect? That's my guess, given the stock's turbulent trading history. Missed expectations make investors gun-shy, and rightfully so. Companies like ARM are also subject to rapid-fire cycles in product innovation, providing potential for a change of fortune even among flyers.

But our electronic world is filled with ARM's licensed products. From the Apple (NASDAQ:AAPL) iPod to Sony's (NYSE:SNE) Sony-Ericsson cell phones, the world of ARM products is expanding -- and so are the company's opportunities.

ARM, based on its growth prospects and relatively low multiple, is flying under investors' radar. Clever Fools should consider whether this company deserves a spot in their portfolio.

Are you looking for more great companies like ARM Holdings? Let Motley Fool co-founders David and Tom Gardner help you find the next big winner with a subscription to Motley Fool Stock Advisor .

Fool contributor W.D. Crotty does not own shares in any of the companies mentioned.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$150.43 (-1.51%) $-2.31
Intel Corporation Stock Quote
Intel Corporation
INTC
$27.52 (-1.96%) $0.55
Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
TXN
$161.29 (-0.82%) $-1.33
Sony Corporation Stock Quote
Sony Corporation
SONY
$68.43 (-1.37%) $0.95
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$121.19 (-2.01%) $-2.49

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