Can ARM Holdings plc Make £1 Billion Profit?

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) to ascertain if it can make £1bn in profit.

Have we been here before?

A great place to start assessing whether or not ARM can make £1bn in profit is to look at the company’s historic performance. Unfortunately, ARM has never been able to make £1bn in profit and it would appear that the company is going to struggle to do so within the next few years.

Indeed, ARM recently reported a net profit of only £105m for 2013, or £218m excluding one-off charges. This indicates that to reach my target of £1bn, ARM’s annual profit would have to jump by approximately 360%.

Still, ARM’s net profit has surged higher by 450% during the last five years and if the company can continue to grow at this rate then it is likely the ARM will hit my profit target of £1bn before the end of the decade. 

But what about the future?

ARM’s growth during the last five years has been impressive, although it remains to be seen if the company can keep up this explosive rate of growth. For example, the company continues to face pressure from industry-leading peer Intel, which continues to try and grab market share off ARM within the high-end micro-chip market. Moreover, there are some signs that demand for microchips to power high-end smart phones is starting to slacken.

Nevertheless, ARM’s management remains upbeat about the company’s outlook and expects the company to meet current City forecasts for 2014. ARM entered 2014 year with a strong order backlog and healthy pipeline of potential technology licencing opportunities, so it’s easy to share in management’s optimism. City forecasts currently estimate that ARM will report a pre-tax profit of £418m for 2014.

appleWhat’s more, management is working on diversifying ARM’s product offering, designing new microchips for a range of products, no longer limiting ARM to high-end smartphones. Diversification away from its traditional market, combined with ARM’s sector leading technology have allowed ARM to grow faster than its sector peers during the past year. Specifically, during 2013 ARM’s processor royalty revenue grew 18% faster than that of the wider market.  

Having said all of that, despite its impressive historic growth, ARM still has a long way to go before the company reaches my profit target of £1bn.

Foolish summary

So overall, I feel that ARM cannot make £1bn profit. 

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In the meantime, please stay tuned for my next verdict.

Rupert does not own any share mentioned within this article.