The Motley Fool

Why ARM Holdings plc May Not Be The UK’s Best Technology Investment

ARM HoldingsInvestors in ARM (LSE: ARM) (NASDAQ: ARMH.US) needed the strong update released by the company this week. That’s because shares in the intellectual property-focused UK technology stock have disappointed hugely in 2014, with ARM currently down over 20% year-to-date. That compares very unfavourably to the FTSE 100’s return of less than 1% over the same time period.

Indeed, ARM has long been seen as the go-to technology company for UK investors. Certainly, the company has merits. As this week’s release highlighted, its top and bottom lines grew by 9% in the first six months of the year and, perhaps more importantly, the update was ahead of market expectations. As such, shares in ARM are up nearly 5% today (at the time of writing).

Growth At A Reasonable Price

However, while ARM is clearly delivering on its growth potential and is forecast to continue to do so over the next couple of years, the current valuation of the company may not be quite so attractive when compared to sector peers. For example, while ARM is forecast to increase earnings per share (EPS) by 13% in the current year and by 24% next year, its current price to earnings (P/E) ratio of 37 may not reflect good relative value.

Indeed, sector peers such as Pace (LSE: PIC) and CSR (LSE: CSR) also have strong growth prospects and are expected to increase EPS at a brisk pace over the next two years. For instance, Pace is forecast to improve on last year’s earnings by 16% this year and then by a further 10% next year, while CSR is set to return to profitability in the current year, before increasing the bottom-line by 19% next year. The key takeaway for investors is that although their respective growth rates are lower than those of ARM, Pace and CSR trade on P/E ratios of just 11.8 and 20.3 respectively. That’s far lower than ARM and highlights the better value on offer at two of its sector peers.

Looking Ahead

Clearly, ARM is still hugely popular among UK investors. It continues to offer the most reliable, most stable and most impressive earnings outlook. Certainly, shares in the company have experienced a bad year thus far, but the company’s update this week shows that it is making strong progress. The question, though, is whether it looks quite so attractive relative to sector peers. While it may have a strong future, ARM may be outperformed by Pace and CSR going forward, both of which offer almost as much growth potential, but at a fraction of the price.

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Peter Stephens owns shares in CSR.