Is There Still Time To Buy ARM Holdings plc?

Can ARM Holdings plc (LON: ARM) move higher, or are the company’s shares overvalued?

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Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.

Today I’m looking at ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) to ascertain if its share price has the potential to push higher.

Current market sentiment

The best place to start assessing whether or not ARM’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company, although at present the market is somewhat wary of technology companies.

Indeed, rising valuations have spooked technology investors during the past month or so, which has lead to a broad sell-off in the technology sector. Unfortunately, ARM has not been immune to the sell-off and so far this year, the company’s shares have dropped nearly 11%.

What’s more, some analysts have expressed concern that as the global smartphone market is starting to mature and sales are slowing,  ARM’s sales could start to slow. 

Actually, ARM’s management stated within the company’s full-year 2013 results that performance had been impacted by a lower demand for high-end smartphone chips during the second half of last year.

Additionally, ARM’s larger peer, Intel continues to offer technology of a similar nature and is snatching market share from ARM within the key smartphone and tablet arenas.

Upcoming catalysts

Still, despite the above factors weighing on ARM’s sales, the company’s management remains proactive and is currently trying to expand the firm’s microchip offering by branching out into the enterprise networking market.

Enterprise networking is a fairly essential part of modern day life as mobile networks depend on enterprise systems to create a path for smartphones to connect to the internet. With the number of mobile devices trying to access mobile data growing every day, equipment makers want the fastest enterprise processors with the lowest power consumption. 

At present, ARM only has a 5% share of this market but management believes that the company can snatch up to 30% of the market by 2018. Moreover, City analysts believe that ARM’s push into the networking market could add around $150m per annum to the company’s bottom line.


Despite the push into the enterprise networking market, there is one thing that worries me about ARM and that is the company’s current valuation. In particular, ARM currently trades at a historic P/E of 53 and a forward P/E of 41, both of which appear expensive.

What’s of more concern, however, is the fact that ARM’s high valuation leaves little room for error and if the company were to report a lower-than-expected profit, then the company’s shares could slide.  

Foolish summary

So overall, I feel that despite ARM’s push for growth the company’s shares are overvalued at current levels.

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.

Rupert does not own any share mentioned within this article. 

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