The Risks Of Investing In ARM Holdings plc

Today I am highlighting what you need to know before investing in ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US).

Lower shipments, lower prices

ARM Holdings faces the dual problem of severe market saturation in both the tablet PC and smartphone sectors, as well as surging consumerARM Holdings demand for cheaper tech products.

Indeed, a recent report from Pyramid Research showed that global phone demand is expected to rise at a compound annual growth rate (CAGR) of 13.7% between 2013 and 2018. By comparison, the International Data Corporation’s ‘Worldwide Quarterly Mobile Phone Tracker’ survey showed sales rose almost 29% during January-March, which itself showed marked slowdown from previous quarters.

On top of this, Pyramid Research also expects the average selling price per unit to fall at a CAGR of 10.8% in the five years to 2018, a situation which should significantly whack ARM Holdings royalty streams in coming years.

Competition upping the ante

On top of this, ARM Holdings is also having to deal with the rising threat of microchip giant Intel. The US company announced just this week that tablet sales had jumped to 10 million units during April-June, doubling from 5 million in the previous three-month period. And the firm added that “we are on track to meet our 40 million unit tablet goal” for the entire year.

The business has invested heavily to revamp its attack on the smartphone and tablet markets over the past year, culminating in the roll-out of its Moorefield and Merrifield microchips earlier this year.

In particular, Intel is making strong overtures towards a number of Chinese manufacturers in a bid to latch onto the budget device segment in one of the world’s hottest emerging markets — Pyramid Research expects China and India alone to account for 40% of the world’s smartphone sales by 2018. ARM certainly has its work cut out for it to stay ahead of the pack.

Stratospheric price leaves firm perilously perched

Like many operators within the tech sector, ARM Holdings deals on elevated P/E multiples which leaves it in danger of a severe price correction. Indeed, shares have surrendered more than a quarter from January’s record peak of £11.10 per share, as fears over slowing demand for mobile devices have prompted earnings downgrades.

Still, the company still deals on heady P/E readouts of 35.4 and 28.7 for 2014 and 2015 correspondingly, gliding far ahead of the benchmark of 15 which generally marks out decent value for money. So even though ARM Holdings has endured a tough 2014, the company’s share price remains susceptible to further heavy weakness.

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Royston Wild has no position in any shares mentioned. The Motley Fool recommends shares in ARM Holdings.