Should Investors Sell ARM Holdings plc As Intel Corporation Muscles In?

Since the beginning of March, shares of ARM Holdings (LSE: ARM) have been on the slide as investors have become concerned about the company’s outlook. 

Indeed, over the past five months, ARM’s shares have slumped by 27%, and according to one broker, there could be further declines to come. 

Analysts at Liberum Capital believe that ARM’s shares could fall another 26% to 650p. However, Liberum’s forecast is the most pessimistic out there. 13 of the 29 brokers covering ARM currently rate the company’s shares a “buy”, and only three have “sell” or “underperform” ratings on the shares. The average City analyst price target is 1,230p. 

However, some City commentators are becoming concerned that ARM’s growth rate is going to slow going forward. 

Main rival

Intel Corporation, which has long been considered to be ARM’s main rival, has finally got its act together. Analysts believe that the company’s new high-performance, low-power chips could capture roughly 50% of Apple’s modem business in the upcoming iPhone due to launch September 9th.

This isn’t the end of the world for ARM. Intel may be poised to grab a tiny fraction of the smartphone chip market, but ARM’s products will still feature heavily in the majority of the world’s smartphones.

What’s more, the company is starting to muscle in on Intel’s server chip market, a market that the tech behemoth has enjoyed a monopoly over for some time. 

Breaking in

ARM decided to try and break into the market for server microchips at just the right time. Amazon, Facebook, Google and Chinese tech giant Alibaba Group, are all aggressively expanding their cloud computing offering, and building data centres is a core part of developing cloud capacity. 

Historically, Intel’s has dominated the market for server computer chips, but now ARM is starting to muscle in. Alibaba Group is moving more and more to servers using chips based on ARM’s instruction set architecture, instead of Intel’s.

What’s more, City analysts believe that Foxconn, the electrical contract manufacturer is designing and building an ARM-based server. Also, other analysts have heard talk that Amazon, Facebook and Google are working on ARM-based CPUs for servers.

So, it looks as if ARM is poised to grab an enormous share of the server chip market from Intel. This diversification should reduce the company’s dependence on the smartphone market and help drive long-term growth. 

Moreover, alongside the company’s expansion into the server market, ARM is expanding into the internet of things (IoT) market, where its high-performance, low-power chips are in demand.

In demand

ARM signed a record 54 new processor licences during the second quarter of this year as IoT technology really started to take off. Much of the financial benefit from these deals will come in later years.

Still, the figures show that ARM is working hard to diversify away from its traditional smartphone market. 

And after recent declines, ARM’s valuation has come down to a level which makes the company’s shares look extremely attractive to growth investors. The company currently trades at a forwards P/E 29.8 and earnings per share growth of 68% is expected this year. These figures suggest that ARM’s shares are trading at a PEG ratio of 0.4. 

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