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Cheap as chips? Is now the time to invest in ARM Holdings plc?

One particularly important (perhaps the most important) rule for investors is to avoid overpaying for shares. ARM Holdings (LSE:ARM) is a great example of a company that many have admired from afar but never been tempted to buy due to the high prices it’s traded at.

Lately, much of the coverage of this FTSE 100 tech giant has been rather negative. The decline in Apple Inc’s (NASDAQ:AAPL) share price has led some analysts to speculate whether ARM’s remarkable growth story can continue, given that it provides the chips that help power the former’s products. If Apple suffers, inevitably so will its suppliers. That said, Warren Buffett’s recent purchase of the iPhone maker has only served to provoke more discussion as to whether prospective ARM investors should regard this as a golden opportunity to climb on board.

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Quality, at a price

What a track record ARM has. Since June 2008, the share price has increased by more than 1000% to today’s 967p. Measures of quality, such as return on capital employed and operating margins, have all been consistently high over this period. Even the company’s dividend has grown at a rapid pace, despite still looking very low compared to its FTSE100 peers at around 1%. Any other positives? ARM doesn’t have any debt. Should it need to make an acquisition or two, it has the reserves to do so. It’s also a great position to be in when interest rates do eventually rise.

Right now, shares in ARM trade on a forecast p/e of 26. Although not as cheap as they were in September 2015 (848.5p), they’re still significantly below their peak of 1,165p.

Pastures new

If questions begin to be asked about a company’s ability to continue growing earnings, particularly at the rate ARM has over the past few years, a lot of investors become wary of the shares. That’s perfectly reasonable. A business can only gallop for so long before expectations aren’t met.

Here’s where ARM might be different, however. The company’s decision to move beyond the smartphone market and diversify into other areas, such as networking infrastructure and servers, is a positive sign. Its growing involvement in the much-touted Internet of Things may also be a catalyst for yet more business to come its way. The board has also decided to invest heavily in R&D to develop “the next generation of processor, physical IP and on-chip system technologies,” according to its Q1 report. CEO Simon Segars says these investments “will drive ARM’s future royalty and licence revenue growth,” and “create new revenue streams”.

A call to ARM?

Could things get worse before they get better? Yes, especially if Apple’s sales continue to dwindle. Might the shares be even cheaper in a few weeks or months time, what with the EU referendum? Again, this is entirely possible, given that we could see more volatility in all share prices over the next month. This makes it more important than ever to recognise that investing sometimes requires you go against the grain and embrace uncertainty.

A company’s ability to foresee potential difficulties and plan for them is a sign of class. That said, more prudent investors may wish to buy modest amounts of ARM over a period of time rather than all at once, given current market uncertainty. 

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Paul Summers 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.

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