Is ARM Holdings plc Set For Electrifying Earnings Growth In 2014?

Royston Wild looks at ARM Holdings plc (LON: ARM)’s growth prospects for the new year.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am looking at microchip builder ARM Holdings’ (LSE: ARM) (NASDAQ: ARMH.US) earnings prospects for 2014.

An expensive pick despite heady earnings outlook

Swelling demand for smartphones and tablet PCs has thrust earnings, and consequently ARM Holdings’ share price, towards the stars in recent years. Even taking into account May’s eye-watering price dip, the stock still gained 43% during the course of 2013 alone.

Market research specialists International Data Corporation (IDC) expect this trend to continue, and reported last month that “despite a number of mature markets nearing smartphone saturation, the demand for low-cost computing in emerging markets continues to drive the smartphone market forward.” They expect global smartphone shipments to pass 1bn units for the first time in 2013, before moving towards 1.7bn by 2017.

Critically for ARM, however, the body also highlighted the accelerating switch towards low-cost devices by consumers — IDC expects an average price of $337 per unit this year, down from $387 in 2012 and which is expected to drop gradually through to 2017 when a price of $265 is predicted.

Of course, this phenomenon will weigh heavily on component builders for the world’s major phone manufacturers, a trend clearly evident out in ARM’s October trading statement. This showed royalties remain static at 4.9 cents per chip during July-September, and as device prices come down this problem is likely to worsen.

Optimists will point to the firm’s entry into new markets and technical innovations as helping to deliver a record 48 licence agreements during the period. But one should not underestimate the rising presence of heavyweight rivals, particularly within ARM’s revenues-driving phone and tablet markets. Most worryingly, Intel continues to ink alliances with long-standing ARM customers such as Samsung, and its plans to turbocharge its chip portfolio over the next 24 months could harm the British company’s earnings outlook.

ARMs’ explosive growth in recent years results in a compound annual growth rate of 27.4% since 2008, and City analysts expect the firm to punch further substantial earnings expansion in the near future. Indeed, the chip builder is anticipated to follow expected earnings of 20.6p per share for 2013, a 38% on-year rise, with an additional 21% increase in 2014 to 25p.

Still, in my opinion these gargantuan growth rates are already factored into the share price, as ARM currently changes hands on a P/E multiple of 43.8 for 2014, a stratospheric reading compared with a forward average of 24.1 for the complete technology hardware and equipment sector.

Although adoption rates of tablet PCs and smartphones is starting to plateau, the market remains ripe for those at the technological coalface in these markets for at least the next few years. But for ARM, in my opinion the threat of accelerating competition in these markets and lower royalty revenues makes it hard to justify the firm’s premium share price rating. And like other entities that carry elevated earnings multiples, I believe that ARM is in danger of a weighty price collapse.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in any of the companies mentioned in this article.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »