After such a good run it’s tempting to ask where future growth at semiconductor intellectual property (IP) supplier ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) is going to come from.
After all, the firm is dominant in its industry and counts its percentage market share of the still-growing smart phone and tablet market in the 90s.
The mobile revolution
Mobile phones, and the consumer drift from talk-and-text devices to smart phones, have been a huge driver for the company’s financial performance over the last few years, according to the firm’s CEO. Consistent double-digit revenue and profit growth rates, and fat margins, have driven the share price up from around 100p ten years ago to today’s 925p.
ARM thinks there’s a lot more to come in the phone market and predicts market growth rates around 10% a year for the foreseeable future. Remember that’s a market that ARM dominates, so we have a potential base rate of growth for the firm right there. The smart phone market is set to stratify and ARM sees opportunity in a new breed of entry-level devices that seem set to bring mobile phone-based computing to billions more in the coming years, and from mid-range and top-end units too.
Other opportunities for growth
Company blurb describes ARM as the world’s leading semiconductor intellectual property (IP) supplier and its technology is capable of driving all kinds of digital electronic products worldwide. The firm’s business model is to license its technology to leading semiconductor manufacturers who then incorporate ARM’s chip designs alongside their own technology to create smart chips suitable for modern electronic devices. It’s all about creating cost-effective and power-efficient solutions, and those solutions can go anywhere. ARM aims to get its intelligence in to everything it can.
Looking forward, ARM sees opportunity in the growing markets for wearable devices and the ‘internet of things’. The vision is that our washing machines, cookers, cars, home lighting systems, and everything else in our environment will soon be talking to each other and to us via mobile devices — all because each one has an embedded chip designed by ARM.
Traditionally, ARM focused on the consumer market, but it now expects to expand into network infrastructure, data centres, and server ecosystems, too. The firm believes that organisations are set to move en masse to cloud computing solutions and aims to position itself to benefit from the migration.
Valuation
Recent first-quarter figures show growth on track and the firm predicts full-year results to be in line with expectations this year. City analysts reckon earnings are likely to grow by 14% in 2014 and by 23% in 2015.
We can currently pick up the shares on a forward P/E rating of around 31, which seems to indicate that investors have high expectations. It’s worth noting, though, that while the shares moved from 100p to highs around 1100p during the last ten years, the P/E looked similarly high the whole time.
