The chips that power the iPad triumph again.
How do you put a valuation on a company like ARM Holdings (LSE: ARM)?
The share price has powered up of late, growing from the 80p mark in 2008 to nearly 630p today, following the release of full-year results.
Yet, based on normalised earnings figures, the shares are on a price-to-earnings ratio of 50, with a dividend of a mere 0.6% to be paid. And those measures are actually better than expected, as the year's results came in ahead of City forecasts. Next year's expectations will surely be upgraded now, but it does look like a few more years of forecast-busting profits are already built into the price.
The year to 31 December brought home a 37% rise in profits, to £230m, with earnings per share up a third at 12.45p. And that led to a nice 5% boost to the shares on the day, on top of the already great growth they have enjoyed over the past 12 months.
Apple mania
The main driver of ARM's chip sales, of course, is the desire for iPads, iPods and iPhones from market leader Apple (NASDAQ: AAPL.US), which itself blew away profit expectations this month after selling 37 million iPhones in the fourth quarter alone.
But it's not just iThings that use all those ARM chips. No, the next exciting prospect is the possible eclipsing of the venerable WinTel alliance by upstart WinARM. At the same time as Intel (NASDAQ: INTC.US) is bemoaning the slow pace of PC sales, Microsoft (NASDAQ: MSFT.US) has produced a version of Windows 8 that runs on ARM processors, and some makers are already showing it on prototype devices. It will still be some time before ARM designs can match the raw processing power of Intel, mind.
But it's not just eye-catching electronic devices that bring in revenues for ARM, as its designs are increasingly being found in mundane things like smartcards and kitchen appliances, too.
Chief executive Warren East was, unsurprisingly, upbeat about it all, saying: "2012 will bring exciting opportunities and challenges as ARM enters competitive new markets where we are well positioned to succeed with leading technology, an innovative business model and a thriving ecosystem of partners."
Overpriced?
I have little doubt that ARM's profits will continue to grow nicely in the coming years, but the key question is whether the current valuation overstates that future potential. ARM provided the third highest share price growth in the FTSE 100 last year, but Fool writer Prabhat Sakya did suggest last month that "the business is priced with the view that it is going to be the next Intel".
And I can't help feeling the same. Shares like this tend to be valued on the assumption that the company will continue to perform at 110% of expectations, and that every prospect will come good no matter how realistic it might actually be. But I've been wrong about technology shares a good few times in the past.
What do you think? Would you buy or sell at these prices?
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