Why Even Value Investors Should Still Get Excited By ARM Holdings Plc

Although shares in ARM Holdings plc (LON: ARM) come with a sky-high price to earnings ratio, excitement should still coarse through the veins of the most disciplined of value investors.

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As readers of the Fool will be well aware, value investing entails buying shares in good quality companies at reasonable prices. One common measure used by value investors is the price-to-earnings (P/E) ratio, with a lower output generally being more attractive than a higher one.

Furthermore, according to various studies in recent years, value investing outperforms growth investing in the long run. Certainly, shorter time periods may differ but a focus on buying high-quality companies at sensible prices seems to be a logical and successful way of investing for Fools like us.

As a result of an unrelenting focus on price, investing in the technology sector proves to be a big ask for value investors, since tech companies often come with extremely high P/Es. Indeed, the current P/E of the sector is a whopping 34; more than 2.5 times more than that of the FTSE 100.

However, within the tech sector is a gem of a company: ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US). It develops and licenses processor and other technology designs that leading semiconductor companies incorporate into silicon chips. Companies that have licensed its products (for which ARM receives both a fee and royalty payments) include AMD and Samsung.

Of course, as a tech company, ARM trades on a sky-high P/E of 79 but this figure has been a lot higher; notably peaking at 94 in 2011. Furthermore, earnings per share is forecast to grow at between 20 and 30% per annum over the next three years, meaning the P/E ratio does not necessarily have to increase in order for investors to make a profit.

Indeed, should growth rates of 20%+ be realised over the next three years, investors in ARM could still realise a substantial profit even if the P/E ratio were to fall. Although hardly good value at the moment — in the eyes of value investors — a P/E ratio of 79 may prove to have been more than reasonable when we look back in 3 years time.

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> Peter does not own shares in any company mentioned in this article.

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.

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