Should You Sell ARM Holdings plc And Buy Imagination Technologies Group plc?

Is now the time to switch ARM Holdings plc (LON: ARM) for Imagination Technologies Group plc (LON: IMG)?

| More on:

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.

Despite announcing that it made a pre-tax loss of £10.7 million in the first half of the current financial year, shares in Imagination Tech (LSE: IMG) have surged by over 10% today. While it may seem rather perverse for a company to report that it has slipped back into a loss, only for its share price to rise strongly, the reason for the uplift in investor sentiment is the medium-term potential that Imagination Tech offers.

For example, the major reason for the loss is an increase in expenses that had previously been flagged up by the company. These costs include significant investment in intellectual property, which should allow Imagination Tech to enjoy higher margins due to a slower growing cost base over the medium term. In fact, it is targeting an operating margin of 30%-40% over the long term, which would clearly be great news for the company’s bottom line, as well as for shareholders.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Growth Potential

Clearly, Imagination Tech has considerable potential. And, as today’s update shows, it is willing to take some short-term pain in order to make the necessary changes so it can deliver impressive growth over the medium term. In fact, Imagination Tech is forecast to post earnings growth of 39% next year, which would be hugely impressive and show that it remains a highly appealing growth play.

Valuation

Encouragingly, Imagination Tech continues to offer such strong growth prospects at a very reasonable price. Certainly, its price to earnings (P/E) ratio of 38.9 may put off a lot of value investors, but when its impressive growth prospects are taken into account, it equates to a price to earnings growth (PEG) ratio of just 1.

This indicates growth at a reasonable price and, in fact, seems more appealing than fellow technology stock ARM (LSE: ARM) (NASDAQ: ARMH.US). It has a PEG ratio of 1.5 and, on this basis, it would be understandable as to why investors would seek to sell ARM and buy Imagination Tech, since the latter offers higher growth forecasts at a lower price.

Looking Ahead

However, ARM still has huge appeal. For starters, it remains a top-notch growth play that is forecast to increase its bottom line by 14% in the current year, and by a further 22% next year. Although lower than Imagination Tech’s expected growth rate, ARM has a much more consistent track record when it comes to earnings growth, with it having risen in each of the last four years by an average of 41% per year.

This contrasts markedly with Imagination Tech, which has seen an increase in its bottom line in only two of the last four years, with earnings increasing by an average of 4% per annum during the period. As such, it seems to offer less consistency than ARM, which may explain why ARM trades on a premium valuation compared to Imagination Tech.

Of course, both stocks could be worth holding in 2015 and beyond and, while Imagination Tech does have a very bright future (especially with regard to an expansion of operating margins), ARM still has huge growth potential, too. Therefore, moving forward, the two companies could make for a potent pairing in Foolish portfolios.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. The Motley Fool UK owns shares of Imagination Technologies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Social media and digital online concept, woman using smartphone
Investing Articles

Apple stock: Buffett is long, Burry is short. What should I do?

Our author thinks about whether following Warren Buffet into Apple stock might be a good addition to his portfolio –…

Read more »

Close-up of British bank notes
Investing Articles

5 ‘no-brainer’ dividend shares to buy today

Is there an easy way to narrow down the list of FTSE 100 dividend shares? I try one approach, with…

Read more »

Close-up of British bank notes
Investing Articles

£5,000 to invest? 2 dividend-paying penny stocks I’d hold to 2030

I think these high-yielding penny stocks could help cushion the impact of high inflation on my returns. Here's why I'd…

Read more »

Renewable energies concept collage
Investing Articles

2 green stocks that I think are no-brainer buys for the future

Jon Smith explains two of his favourite green stocks at the moment, one for growth and the other for income…

Read more »

An airplane on a runway
Investing Articles

The Rolls-Royce Share price may be set for take-off!

After an upbeat Civil Aerospace Investor Day, here's why I think the Rolls-Royce share price could be set for take-off…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

2 beaten-down growth stocks to buy as inflation rises

Despite inflationary pressures and recession concerns, I am looking at some top growth stocks to solidify my portfolio over the…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Is the IAG share price too good to miss at current levels?

Jabran Khan delves deeper into the current state of play with the IAG share price and decides if now is…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

5 of the highest-paying income stocks compared! Which one is best for my portfolio?

Income stocks are certainly in vogue right now amid sky-high inflation. But which of these big dividend payers is the…

Read more »