It’s been a rather disappointing year for investors in ARM (LSE: ARM) and Pace (LSE: PIC), with shares in both technology companies failing to beat the FTSE 100. Indeed, while the wider index has risen by 0.5% since the start of the year, ARM is down 14% and shares in Pace have fallen by 5% year-to-date.
However, the future could be a whole lot better for investors in the two stocks that it has been in the past. Here’s why.
Clearly, a key reason why technology stocks appeal to investors is their potential for above-average earnings growth rates. On this front, neither ARM nor Pace disappoint. For example, ARM is expected to increase its bottom line by 11% in the current year and by a further 23 % next year, while Pace’s earnings are due to rise by 14% this year and by 8% next year.
Both of these growth rates are possible due to sound business models that have huge potential. For example, ARM’s focus on intellectual property allows it to remain nimble in a fast-moving technology space, which is a crucial asset to have. Meanwhile, Pace’s ability to offer a wide range of pay-tv solutions at differing price points allows it to maintain a global presence – even when the advancement of those solutions is at different stages across the globe.
However, what really appeals about the growth prospects of both companies is their resilience. While many of their technology peers switch back and forth between periods of strong earnings growth and periods where earnings fall at a rapid rate, the bottom lines of ARM and Pace are remarkably stable.
For example, both companies have grown profits in four of the last five years and, in the year in which profits have fallen, they have only fallen by a relatively moderate amount of 4% in ARM’s case, and 20% in Pace’s case. This means that, over the last five years, the average earnings growth rates of the two companies are 32% (ARM) and 42% (Pace). This is highly impressive and should provide investors with optimism moving forward.
Despite upbeat growth prospects and more resilience than you may at first realise, both ARM and Pace trade at reasonable valuations. For example, ARM has a price to earnings growth (PEG) ratio of 1.5, while Pace’s PEG is even lower at just 0.7. This indicates that both stocks are attractive at current price levels and, therefore, even though they have disappointed so far in 2014, they could prove to be winning plays over the medium term.
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Peter Stephens 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.