When it comes to UK technology stocks, ARM (LSE: ARM) (NASDAQ: ARMH.US) tends to be the go-to stock for many investors. Certainly, it’s a great company with a vast amount of potential. However, sector peer, Pace (LSE: PIC) also has the scope to deliver strong gains over the medium to long term, with the company today focusing on set top boxes and pay TV services. Indeed, it could prove to be a better buy than its better-known rival.
The last year has seen a marked difference in the performance of the share price of both stocks. While Pace has pushed on to higher highs, delivering capital gains of 43% in the process, ARM is up a comparatively disappointing 8% over the same time period. However, this does not mean that Pace is now trading at unsustainably high levels versus ARM.
An Attractive Price
Indeed, in spite of the price rises, shares in Pace still seem to offer good value at current levels. For example, they trade on a price to earnings (P/E) ratio of just 12.2, which is below the FTSE 100‘s P/E of 14.2. In addition, Pace continues to enjoy relatively strong cash flow, with its free cash flow yield being a highly impressive 22% last year.
Furthermore, Pace continues to offer strong growth prospects, with earnings per share (EPS) set to increase by 17% this year and by 7% next year – highlighting its potential as a growth stock. This has been in evidence over the last five years, where Pace has increased EPS in four of the five years and has average earnings growth of over 40% per annum during that period.
Meanwhile, ARM continues to offer huge potential, with EPS forecast to grow by 14% this year and by 23% next year. Although higher than for Pace, these super-high growth rates must be paid for and ARM’s valuation is considerably higher than that of Pace. For instance, ARM trades on a P/E of 38.4 and has a free cash flow yield of just 2.3% — both of which do not compare favourably to those of Pace.
Certainly, ARM has the potential to grow earnings at a rapid rate. That’s at least partly because it focuses on intellectual property rather than manufacturing, and so is able to keep up with changes to demand and tastes. Therefore, while shares in the company are expensive, they could perform well over the medium to long term.
However, Pace appears to be great value, with growth potential and extremely strong cash flow. As a result, although ARM may continue to be the first-choice in the technology space for many investors, Pace could also have a very bright future, too.
Peter does not own shares in Pace or ARM. The Motley Fool has recommended shares in ARM.