ARM Holdings plc: Overpriced, But Still A Buy?

ARM HoldingsRemember 1981? The first space shuttle was launched. The Police and The Human League were storming the charts. And the first BBC micro was sold, made by a then unknown company called Acorn Computer, which you might today call a small cap.

My parents bought me a BBC micro that year. I remember countless hours spent playing Elite, and writing my first computer programmes.

These were the halcyon days of the British computer industry but, eventually, after the first flush of success Acorn and Sinclair could not reinvent themselves, and they would be overrun by competition from IBM and Apple.

A company built on an idea

But the boffins at Acorn had an idea: could they make computer chips which used a reduced instruction set? This would produce chips which were fast, yet were lighter, more compact, and produced less heat and consumed less energy than chips from companies such as Intel.

So in 1990, based on this simple idea, ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) was created. For years this company stood in the shadow of Intel, which rode the wave of the personal computer boom. Intel’s chips grew steadily faster and faster, as Moore’s Law became reality, and PCs appeared on virtually every desk in the world. The Wintel monopoly dominated the tech world. The thing about trends is that they can last much longer than you would ever have thought.

But then, in 2007, the iPhone came out. And it had an ARM microprocessor.

As always, it took investors a while to cotton on to what was happening. Believe it or not, after the launch of the iPhone the share price of ARM did not increase; in fact it tumbled. But by the end of the naughties sales of ARM processors had taken off, and so had the share price. ARM’s share price has ten-bagged since the lows after the iPhone was launched.

ARM has many more years of growth

So, what’s next for ARM? Well, the share price has increased so much that it now looks expensive, indeed overpriced. The 2014 P/E ratio is 37, falling to 30 in 2015.

But just recall what I said about trends: they often last much longer than you think. While sales of computers are falling, sales of smart phones and tablets just keep rising. And now we have smart watches, and smart glasses. And soon we will have the internet of things, where just about every device you can think of will have a chip, and many of these will be ARM chips.

I can see many more years of growth for this tech business. ARM still is the future of chips. That’s why this company may seem over-priced, but it still is a buy for me.

A top growth share from the Motley Fool

ARM has been perhaps the growth story of the last decade. We at the Fool are constantly on the look-out for shares which could be the growth stories of the next decade.

And my fellow Fool and growth expert Maynard Paton has unearthed a company which has really strong growth prospects, and he is so confident about this business that he has written a free report all about this find.

Want to learn more? Well, just click on this link to read about "A top growth share from the Motley Fool".