Down 16%, are Arm Holdings shares a no-brainer buy?

Arm Holdings shares are on the market once again. Are they a no-brainer buy? Or should investors steer well clear of this value trap?

| 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.

artificial intelligence investing algorithms

Image source: Getty Images.

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.

If you pick up your smartphone, there’s a 99% chance that it wouldn’t turn on without the electronic architecture of Arm Holdings (NASDAQ: ARM). Its shares went public for the first time in eight years last week.

The tech firm is a British success story. It was founded in Cambridge in 1990 and has now become one of the world’s most important companies. Its designs are crucial to making electronics around the world run, including almost all smartphones.

It’s so vital, in fact, that huge names like Apple, Alphabet, Samsung, and Nvidia all invested in Arm last week. And with the shares on the market again, I have the chance to buy in too. So, what am I saying? This is a no-brainer buy, isn’t it?

Well, the first thing to point out is that this stock has nothing to do with the London Stock Exchange. The firm, still based in Cambridge, chose a US listing to attract a higher valuation. And in fairness, it’s hard to argue with the result. 

A huge valuation

Arm shares went public last Thursday at $51 before shooting up to $64 by close of play. The demand was high – understandable for such a great company – but the price doesn’t make much sense to me.

The firm had an earnings-per-share of $0.39 last year, a tiny figure compared to the $64 share price. On those numbers, Arm trades at over 100 times earnings. That’s a crazy valuation. 

If Arm attracted the same price while listed in the UK, it would comfortably find a home on the FTSE 100. Its market value of $60bn would even see it sneak into the top 10. Its P/E would be the highest on the index and by some distance too. 

Nvidia is an obvious comparison here. The US chip designer also has a P/E of over 100. The difference is Nvidia is growing revenue and income, whereas Arm isn’t. Arm’s net income actually declined last year. How can you justify a P/E over 100 with declining profits? I don’t think you can. 

A reason the price could be so high, and a cause for further concern, is the low supply of Arm shares. The float is only 9% of all the shares outstanding. With such a small number of shares available, I’d expect high volatility. 

We’ve seen this already with a 25% leap last week. Then, in yesterday’s trading, the stock dropped 16%. These ups and downs make the stock a risky buy, and with so few shares on the market, I expect more erratic moves over the coming weeks.

To make things worse, a small float can create a squeeze in price even from low demand. That could push the share price up in the short term, but lead to a crashing price if and when SoftBank – Arm’s owner – chooses to sell more of its stake. 

A buy?

The fundamentals just don’t add up for me here and I can’t see how the share price is justified. And that really is the rub. As much as I’d like to own the shares of such a great British enterprise, I won’t be buying at the current price.

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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Fieldsend has positions in Apple. The Motley Fool UK has recommended Alphabet, Apple, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Taylor Wimpey shares yield a fabulous 6.41%, but is the dividend safe?

Harvey Jones has enjoyed plenty of growth and income after buying Taylor Wimpey shares last year. But is today's high…

Read more »

Yellow number one sitting on blue background
Investing Articles

1 FTSE lithium stock I think could be ready to rocket

Jon Smith explains why the lithium price could be due a rally, and why shares of one related FTSE stock…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
US Stock

This growth stock that Warren Buffett owns just hit 52-week lows. Should I buy?

Jon Smith flags up a high-profile US stock that the great Warren Buffett bought back in 2020 but which has…

Read more »

White female supervisor working at an oil rig
Investing Articles

Could the UK general election be bad news for this FTSE 250 energy producer?

The country is due to vote in the general election on 4 July. Our writer looks at the possible implications…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should we buy cheap FTSE 100 shares now, before it’s too late?

The FTSE 100 is up 5% so far in 2024 and hit an all-time high in May. That means the…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Here’s why I think the Lloyds share price could hit a 5-year high in 2024

It's up 13.5% so far in 2024, and reaching new highs. But where might the Lloyds Bank share price go…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

If I’d put £15k into this FTSE 250 stock in 2008, I’d have over £1.26m today

This multi-billion-pound business has created plenty of millionaires over the last 16 years, but can it repeat this performance?

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

3 dividend shares I’ve bought for the next decade!

I think these UK dividend shares can amplify my long-term passive income, and could even be on track to becoming…

Read more »