Shares in ARM (LSE: ARM) (NASDAQ: ARMH.US) have easily outperformed the FTSE 100 over the last year, with them having risen by 11% versus just 4% for the wider index. Furthermore, it has paid to hold shares in ARM rather than a slice of Blinkx (LSE: BLNX) or Pace (LSE: PIC), since their performance has disappointed hugely, with them being in the red by 73% and 26% respectively.
However, does this now mean that Blinkx and Pace are better value than ARM? Or, should you stick with ARM for the long run?
A major plus for investors in ARM is its track record of growth, which is robust and relatively stable for a technology company. For example, during the last five years ARM has managed to increase its bottom line in four of the five years, with growth averaging a hugely impressive 29% per annum. For a technology company, this consistency is relatively unusual, although sector peer, Pace, has also managed a similar feat of only one year in five seeing profitability fall. Its bottom line, though, has increased at a lower annual rate than that of ARM during the period, with it averaging 18% per annum.
Still, Pace’s performance is much more appealing than that of Blinkx, which is expected to swing to a loss in the current year. A key reason for this is a significant shift in the market, with Blinkx arguably being a step behind the change from desktop to mobile. As such, its 37% average annual growth in profit over the last three years is set to come to an abrupt end.
Despite this, Blinkx has considerable future potential. Its management team is attempting to transition the business towards the faster-growing space of mobile and, with a strong balance sheet and plenty of cash, it seems to be on the right track to return to profitability in 2017.
However, much of Blinkx’s future potential appears to already be priced in. For example, its shares have risen by 15% this year and now trade on a forward price to earnings (P/E) ratio of 62.5. This is much higher than ARM’s P/E ratio of 35 and, with the latter being forecast to increase its bottom line by a hugely enticing 69% this year and a further 20% next year, its price to earnings growth (PEG) ratio of just 0.6 has huge appeal.
Of course, Pace continues to offer excellent value for money. For example, it trades on a P/E ratio of just 8.3 which, given its excellent track record of growth, seems to be very difficult to justify. Certainly, its growth prospects for the next couple of years are somewhat disappointing, with the company’s net profit due to flat line, but its long term potential remains very sound.
So, while ARM’s current valuation is very appealing and it is an extremely high quality company that is worth buying at the present time, Pace seems to offer the greatest scope for share price gains over the medium to long term. And, while the future will inevitably be volatile for Blinkx, it remains attractive but can only manage third place when up against the likes of Pace and ARM.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings and Pace. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.