Although I like Tesla as a business, and I am bullish on the long-term prospects of the stock and of the electric vehicles industry, I consider that the market overreacted to the quarterly earnings surprise and that there is potential for a price correction once the short squeeze is resolved. In other words, I like this stock as a long-term holding, but I would be extremely cautious in the short term because a sudden correction could be very close.
I think that a conservative way of playing this stock is buying the just released Convertible Bonds, which pays a meager 1.5% interest but offers material appreciation if Tesla’s strategy succeeds. The worst you can get is receiving your money back after 6 years and collect a tiny interest while watching how equity investors suffer.
Upside potential from the smartphone market
ARM Holdings plc (ADR) (NASDAQ:ARMH) is a semiconductor company that designs microprocessors, and that also operates other related business lines such as intellectual property, and software and development tools. In contrast to other microprocessor companies such as AMD and Intel, ARM Holdings plc (ADR) (NASDAQ:ARMH) does not manufacture its own CPUs, but rather sells licenses of its technology as Intellectual Property to chip makers, which in turn adapt the designs to their specific needs. This means that ARM Holdings plc (ADR) (NASDAQ:ARMH) operates a “light” business model, which does not require significant capital expenditures to succeed. For example, Intel Corporation (NASDAQ:INTC)‘s CapEx represents 61% of its operating cash flow, while ARM Holdings plc (ADR) (NASDAQ:ARMH) pays its CapEx with just 11% of its OpEx cash flow.
ARM Holdings plc (ADR) (NASDAQ:ARMH) technology is being used in a wide range of end products, from very simple products such as automobile keyless entry systems, garage door openers, toys, to more complex systems such as smartphones and tablet computers, which provide the largest source of revenue. For example, Google’s Android operating system runs on chips designs using ARM Holdings plc (ADR) (NASDAQ:ARMH) technology.
Key to ARM success is the low-cost and energy efficient designs. ARM closed on May 10 at $49.59, achieving a return of 104% over the past year. The bullish trend might continue, as the fundamentals of the company look bright. ARM´s operating margin of 30.3% is ranked higher than 98% of the 622 companies in the Global Semiconductors industry, well above the industry median of 2.6%. Its net margin of 22.9% and revenue growth of 11.9% both point out to a healthy environment that justifies high valuation multiples. In fact, ARM is trading at a P/E of 85x, which is well within the range it traded over the past 3 years. In other words, in terms of multiples, ARM has traded at a higher valuation in the past.
