29 Reasons Why ARM Holdings plc Is A High-Risk Stock Selection

In this article I am looking at why ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) should be concerned by rapid sales declines across key tech markets.

Smartphone and tablet sales on the slide

ARM Holdings currently sources almost a third of its revenues from the mobile phone market alone, so signs of waning phone and tablet PC sales comes as a serious concern. Indeed, smartphone demand growth of 29%, to 279 million units, during January-March illustrates the huge slowdown which threatens to derail the company’s earnings outlook.

Those numbers, released this month by technology research house Canalys, compare starkly with sales expansion of 48% printed during the corresponding 2013 period. Sales grew by 44% last year to 998m units, further illustrating the huge drop-off in consumer purchases which kicked off in the latter half of 2013.

And in the tablet PC market, Canalys reported that global shipments grew just  21%, to 51 million units, during the first three months of apple2014. This represents an eye-watering slowdown when tallied-up against the 106% advance seen during the same period last year.

Although growth continues to rocket in developing regions — indeed, sales to the BRIC (Brazil, Russia, India and China) block of countries accounted for 44% of global smartphone sales during January-March — worsening market saturation in key Western territories continues to put the dampeners on previously-stratospheric global growth rates.

ARM Holdings is attempting to diversify into new product markets such as networking and servers, but moves into these areas are at a fledgling stage and the competition is fierce.

Speaking of which, chip manufacturing giant Intel is also gearing up its attack on the tablet and mobile telephone sectors. The company officially launched its exciting Bay Trail and Merrifield chips in February, cutting-edge technologies which are expected to rejuvenate its beleaguered mobile division and thrust adoption rates from major manufacturers higher.

ARM Holdings is expected to experience a sharp earnings growth slowdown this year, with expansion of 14% down markedly from 40% in 2013. A slight recovery, to 24%, is pencilled in for 2015. These projections mean that the Cambridge-based firm is dealing on elevated P/E multiples of 36.4 and 29.4 for this year and next, well above the benchmark of 15 which generally represents reasonable value.

Of course the business of dealing on elevated multiples leaves companies at risk of a serious share price correction, a scenario which the British chipbuilder is no stranger to. And with sales of mobile devices likely to experience sustained weakness, I believe that ARM Holdings is a highly risky stock pick.

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Royston does not own shares in ARM Holdings.