Shares in ARM (LSE: ARM) (NASDAQ: ARMH.US) have disappointed hugely during the course of 2014. Indeed, they have fallen by a staggering 24% since the turn of the year in spite of company updates that have generally been positive.
As a result, shares in ARM are now trading on a far more attractive valuation and, with its future prospects remaining bright, it could be worth adding to Foolish portfolios. Furthermore, it could help you to retire rich. Here’s how.
Transition
All companies go through a life cycle that involves differing growth rates. For example, in their early days most successful companies achieve their fastest, albeit more volatile, growth spurt and this naturally slows down as the company becomes more mature. It also means, of course, that cash flow and the company’s finances become more reliable and consistent over time, which in many investors’ eyes makes up for a drop-off in bottom line growth.
So, it is perhaps unsurprising that ARM is experiencing a slowdown in its bottom line growth prospects. While the company has been able to increase earnings at an average rate of 41% per annum over the last four years, the next two years are set to see lower growth rates. For example, in the current year ARM is forecast to grow profit by 12%, with it due to increase by 23% next year.
Valuation
While this potential drop-off in the pace of earnings growth may disappoint a number of investors, ARM’s share price appears to fully reflect it. Indeed, ARM trades on a price to earnings growth (PEG) ratio of 1.3, which indicates growth is on offer at a very reasonable price. Furthermore, with ARM’s track record of growth, it can be said with a relatively high degree of certainty (especially versus many of the company’s technology peers) that it will meet its guidance moving forward.
Looking Ahead
So, while ARM may be transitioning into a slower growth company, it’s all relative. While the days of averaging 41% earnings growth per annum may be behind it, growth of 12% this year and 23% next year is still hugely attractive. With its relative stability and consistency, ARM could prove to be a fast-growing and yet reliable technology stock that could boost your portfolio returns over the long run. As a result, it could help you to retire rich.
