The Benefits Of Investing In ARM Holdings plc

Today I am outlining why ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) could be considered an attractive addition to any stocks portfolio.

A potential takeover target?

With acquisition activity hotting up across the semiconductor sector, I believe that ARM Holdings stands a good chance of ARM Holdingsbecoming the target of a potential suitor in the coming months.

In the latest big-money approach, British microchip builder CSR has just announced the rejection a takeover approach from American tech giant Microchip Technology. Although the company did not announce how much the US firm had agreed to stump up, the Financial Times announced that a fee in the region of $3bn — almost double CSR’s pre-announcement market cap — can be expected.

CSR is a huge player in the ‘Internet Of Things,’ a loose term used to describe communication between electronic devices without human interference. Viewed by many as the next red-hot tech growth area, the world’s tech giants are falling over themselves to get gain an edge over their rivals, a situation which could see ARM Holdings emerge in the crosshairs. Should such a situation occur, the business would also be anticipated to command a hefty premium.

New markets boost growth potential

ARM Holdings’ terrific growth during the past decade has been thanks to the stratospheric adoption of smartphones and tablet PCs, a sector in which it is a key component supplier for the likes of Apple and Samsung.

But with market saturation in Western markets hammering sales volumes, and macroeconomic pressures in emerging markets affecting customer purchases there, fears have grown that ARM Holdings could experience a severe earnings slowdown in coming years.

To combat this weakness, the business is actively expanding in other areas such as servers and networks, a decision which is starting to pay off handsomely. ARM Holdings shipped a total of 2.7 billion chips in April-June, up 11% year-on-year, and enterprise networking demand alone surged 30% during the period.

City analysts suggest that diversification into these new areas should keep growth rolling in coming years, with the Cambridge-based firm anticipated to follow growth of 10% this year with expansion to the tune of 23% in 2015.

Although these figures still leave the business dealing on lofty P/E multiples of 41.6 and 34 times prospective earnings for these years, soaring above the yardstick of 15 which suggests decent value, some would argue that ARM Holdings’ exceptional earnings track record — not to mention position at the coalface of tech innovation — fully justifies this premium.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended shares in ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.