What’s Stopped Me From Buying ARM Holdings Plc Today

Royston Wild considers the investment case for ARM Holdings plc (LON: ARM).

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 ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), and considering whether the company knows the passcode to deliver strong returns.

Question marks rumble over future royalties

ARM Holdings announced last month that revenues jumped an impressive 27% in the first six months of 2013, to £341.5m, pushing pre-tax profit 37% higher to £176m. Encouragingly, the company also upped its licensing guidance to $80m from $75m, although it modestly slashed its royalty projections.

However, doubts abound as to whether the firm can maintain the strength which has seen the share price rocket in recent years. Liberum Capital argues that although licensing levels remain high, this may not necessarily translate into juicy royalties for the company.

In particular, dozens of small start-up companies in China have been established recently in the smartphone and tablet PC space. These firms are chasing the same product categories and thus creating market fragmentation, the broker says.

And ‘while price competition between them could trigger some additional volumes, we do not think the additional volumes so generated would be proportionate to the increased licensing revenues,’ Liberum notes. High competition and market maturity are also likely to lead to failure amongst many of these companies, and although Asia does not represent the be-all-and-end-all for ARM Holdings, the region represents a big deal to the company in terms of licensing numbers.

Threat of competition also shakes projections

The increasing presence of the likes of Intel in ARM Holdings’ space is also casting doubts over future licensing and royalties prospects. Intel — which is ready to launch its 22nm Silvermont architecture in the coming months, and integrated LTE modem solutions in 2014 — is steadily growing its customer base by courting both top level and small customers. This is likely to lead to rising doubts over ARM Holdings’ ability to guard its market share moving forwards.

Still an expensive pick despite recent weakness

Although ARM Holdings’ share price has fallen sharply over the past couple of months — the company has fallen almost 21% from May’s all-time peak of 1,076p — I believe that the stock still remains vastly overpriced.

The firm currently boasts a prospective P/E rating of 42.3, based on City estimates, vastly above a reading of 22 for the whole technology and hardware sector and the broadly-considered value benchmark of 10. A sharp collapse could be in the offing should royalties projections come under scrutiny and competition hot up over the next year.

Chipping in with Foolish investment ideas

Although ARM Holdings presents a massive gamble at current levels, I believe that there are ample opportunities to significantly boost your investment returns elsewhere with less risk attached. And I strongly recommend that you check out this special Fool report which outlines the steps to help you become a market millionaire.

Our “Ten Steps To Making A Million In The Market” report highlights how fast-growth small-caps and beaten-down bargains are all fertile candidates to produce ten-fold returns. Click here to enjoy this exclusive ‘wealth report’ — it’s 100% free and comes with no obligation.

> Royston does not own shares in ARM Holdings.

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.

More on Investing Articles

Google office headquarters
Investing Articles

$1bn a day! This S&P 500 share still looks like a stock market bargain after Q1 earnings

The owner of Google and YouTube just announced strong results to the stock market, including another massive $70bn share buyback.

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

3 cheap FTSE 100 stocks with big dividends to consider buying right now

Sector weakness in some FTSE 100 industries has also left some of my long-term favourite stocks offering attractive dividend yields.

Read more »

Growth Shares

Forecast: £1,000 invested in Rolls-Royce shares could be worth this much by next year

Jon Smith talks through both his opinion and analysts’ forecasts when trying to predict where Rolls-Royce shares could head from…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

£5,000 invested in Lloyds shares 5 years ago is now worth…

The price of Lloyds shares has more than doubled over the past five years. However, our writer’s cautious about the…

Read more »

Investing Articles

Up 58% in a year, the BT share price could be the FTSE 100 target to beat in 2025

The BT share price has been steadily climbing back since newish boss Allison Kirkby came on board. Is the new…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

£10,000 invested in Nvidia stock 5 years ago is now worth…

Even after the Nvidia stock falls of the past couple of months, its five-year performance remains stunning. And it could…

Read more »

artificial intelligence investing algorithms
Investing Articles

I asked ChatGPT for the best UK stocks to buy for my portfolio in the market sell-off. Here’s what it said

When Edward Sheldon asked the generative AI app for the best stocks to buy amid the market pullback, he was…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Could now be a rewarding moment to buy shares?

Christopher Ruane's looking for shares to buy in a turbulent market. But while he's focused on quality, he's equally interested…

Read more »