ARM Holdings plc Still Has Massive Growth Potential

Shares in ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) have 12-bagged over the past 10 years, but can they do the same again?

Another 12-bagger might be pushing it, but all the signs suggest many years of growth still ahead of the Cambridge-based chip designer, and the scene is already set for an eventual transition to high-dividend maturity.

Slowing growth?

Current forecasts indicate a rise in earnings per share (EPS) for this year of a modest 14%, and up a further 22% in 2015. Last year saw 40%, but there is some cyclical nature to the computer and processor roll-out business — and there has been some exchange-rate impact on earnings quoted in sterling.

How is business going and is ARM looking like it will live up to expectations?

At third-quarter time, announced on 21 October, ARM told us that revenues in dollar terms were up 12% (though only up 6% in pounds), and that normalised EPS was up 16%.

But what really matters is the growth in uptake of ARM technology. During the third quarter, ARM signed 43 new processor licences. They were spread across the company’s three main areas of business; mobile computing, enterprise infrastructure, and embedded intelligent devices; and all three have massive potential future growth.

3 billion!

And the number of chips actually shipped? Three billion (yes, billion) in the quarter — that’s almost one for every two people on the planet, and is 19% ahead of the same quarter a year previously.

The ARM share price has actually fallen 8.2% over the past 12 months to 873p, so is it a good time to buy on what looks like weakness for such a high-flyer?

Well, we’re looking at a year-end P/E of 37, and while that might seem high compared to the FTSE 100 average of 14, it’s the lowest we’ve seen ARM trading at since 2009! And with more growth expected in 2015, the P/E would drop to just 30 — the majority of brokers on a Strong Buy stance seem to think that’s cheap!

What about the very long term?

Dividends rising

Growth will slow down at some stage, but ARM is already ramping up its dividend in advance of that time — it was boosted by 26% last year, and we have rises of 14% and 25% penciled in for this year and next.

The yield is still low — just 0.7% expected this year, because of the growth premium in the share price. But if ARM shares were on an average P/E of 14 right now, dividends would already be yielding close to 2%. I reckon the yield will be above average long before the P/E gets that low.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended 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.