3 Worrying Reasons Why ARM Holdings Plc Is Ready To Plummet

Today I am looking at why I believe ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) is a prime candidate for a significant stock price slide.

The spectre of increased competition

ARM is being increasingly troubled by US chip giant Intel, which has gained significant momentum in the smartphone market since introducing its Medfield chipset in 2012. The scheduled rollout of its 22nm Silvermont architecture by the close of 2013 has received rave reviews in testing, and threatens to take Intel’s presence in the phone and tablet PC space to the next level.

Intel has been effective in challenging ARM’s supremacy by actively courting phone and tablet manufacturers, both large and small. So far the firm has inked deals with tech giant including Lenovo and Acer, and although its market share in smartphones still remains fairly modest, I expect this to gain significant traction looking ahead.

Royalties could be set for slide

To help facilitate future growth, ARM is ratcheting up its attack on the servers, networking and microcontrollers markets. However, potential royalties here are set to provide slim pickings compared with its established phone and tablet spaces, which, as I have explained, are set to experience increased competition.

As well, Liberum Capital points out that intensifying price battles across the highly competitive smartphone and tablet markets — and consequent effect on ARM’s royalties — combined with signs of volume slowdowns for these products in recent times also raises questions over future revenues.

Bloated valuation threatens potential price crash

In my opinion, ARM is at high risk of a severe share price correction should rampant earnings projections fail to materialise. The company was recently dealing on an elevated P/E rating of 41.1 and 33.7 for 2013 and 2014 respectively, according to current broker estimates. This is far in excess of the broader technology and hardware sector’s prospective P/E readout of 21.4.

ARM’s stock price has exploded by more than 650% over the past five years to current levels around 882p, as business across the computer and mobile phone sectors prompted earnings to balloon. Still, prices dipped more than 30% in just over a month after striking record peaks of 1,097p in May, after the last investor day failed to assuage concerns over future growth momentum. Investors should be aware of the risk of massive volatility for stocks trading at elevated prices.

Chipping in with other Foolish picks

So although I am not prepared to stick my cash in ARM Holdings at present, legendary investment guru Warren Buffett has selected a blue-chip marvel ready which I believe is on course to supercharge returns for plucky investors.

The Motley Fool’s “One UK Share that Warren Buffett Loves!” report spells out this fantastic opportunity just waiting to be snapped up. The company in question boasts great dividend and earnings growth potential, and our exclusive report gives the lowdown on the firm’s investment appeal. Just click here for your copy — it’s 100% free and comes with no further obligation.

> Royston does not own shares in ARM Holdings.