Its designs are used by companies like Apple Inc. (NASDAQ:AAPL), NVIDIA Corporation (NASDAQ:NVDA), Microsoft Corporation (NASDAQ:MSFT), and QUALCOMM, Inc. (NASDAQ:QCOM). ARM has 95% of the market share in mobile phones, 35% in networking, 45% in digital TVs, and 18% in microcontrollers. Last year, the company sold around 9 billion ARM-based processor chips, accounting for 32% of the total market. Its closest rival, Intel Corporation (NASDAQ:INTC), had 16%.
Moreover, ARM Holdings plc (ADR) (NASDAQ:ARMH) is primed for more growth in the coming years. Smartphones can earn the company 5-10 times more royalties per chip and the market is expected to double by 2016, while tablets are still in their infancy and are expected to overtake the PC as the preferred computing device of choice for consumers in the future. By 2015, the company expects to control about 50% of the mobile PC market: laptops, tablets, and netbooks.
Still, ARM faces some competition with Intel, which has already started developing its own low-powered chip architecture. However, how much of a threat Intel is to ARM remains to be seen.
5. Valuation: Shares are trading at a forward price-to-earnings ratio of 56, a significant premium to its 10-year average P/E of 34. However, its PEG ratio of 1.05 compares well with the sector PEG of 0.9.
My verdict on ARM
There is no question ARM is a great company and it is likely to continue growing at an impressive rate the next few years. However, high expectations are already built in its share price and, at such lofty valuations, there is almost no room for error. Also, a rival such as Intel, with its size and resources, could pose a credible threat to ARM’s foothold in the smartphone and tablet market. Therefore, it would be more prudent to wait for a better opportunity to buy this excellent company at more sensible valuations.
So overall, I believe ARM at 1,066 pence looks like a hold.
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In the meantime, please stay tuned for my next verdict on a FTSE 100 (INDEXFTSE:UKX) share.
The article ARM Holdings: Buy, Sell, or Hold? originally appeared on Fool.com is written by Zarr Pacificador.
Zarr Pacificador has no position in any stocks mentioned. The Motley Fool recommends Apple, Intel, and NVIDIA. The Motley Fool owns shares of Apple, Intel, Microsoft, and Qualcomm.
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