Bid Talk Gets Me Excited About ARM Holdings plc

Nothing gets a share price moving like bid speculation.

Indeed, ARM (LSE: ARM) (NASDAQ: ARMH.US) has been the topic of bid talk recently, with rumours swirling that Intel could be a potential suitor for the leading microchip designer.

Of course, rumours of an Intel acquisition have been rife for much of 2013, but ARM’s shares still reacted strongly to the speculation, now being within sight of their all-time high of 1,097p.

So, with the Intel/ARM story potentially having more mileage in in yet, I’m thinking about adding ARM to my portfolio.

Moreover, bid talk aside, there are three clear reasons why I think ARM is an attractive investment.

Firstly, the quality of ARM’s products is quite astonishing.

The company does not merely manufacture its own products, rather it is at the forefront of design. Not only does this equate to a stronger focus on ensuring the end product is highly innovative, it also means that ARM can divert all of its resources towards the sole aim of developing ideas and designs that are ground-breaking and for which there is very high demand.

Indeed, high quality, innovative products lead to high margins that are sustainable, making ARM a highly profitable business.

Secondly, because ARM is focused on intellectual property, it enjoys substantial barriers to entry in the form of patents. Such barriers to entry provide ARM with even higher margins than it would normally experience.

Moreover, unlike pharmaceutical companies that have to worry about their products going off-patent, by the time a patent expires in ARM’s line of work, technology has often moved on so much that the expiry is not as important. This means that ARM will not necessarily be exposed to ‘patent cliffs’ that can be an issue with other sectors.

Thirdly, ARM’s growth prospects are highly impressive. Earnings are forecast to grow by 40% this year and 23% next year, with only a small number of stocks being able to offer equally attractive growth rates.

Although these figures are estimates, ARM does tend to deliver on the growth front and is able to offer a degree of consistency in terms of year-on-year growth that other technology companies struggle to achieve.

So, ARM impresses me a great deal because of the persistent bid talk, high barriers to entry, the quality of its products and the excellent growth rate in earnings that are currently expected by the market. Indeed, ARM is one of my favoured growth stocks.

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Peter does not own shares in ARM.