LONDON — There are some striking similarities between ARM Holdings plc (ADR) (NASDAQ:ARMH) and Apple Inc. (NASDAQ:AAPL).
Both companies owe their success to consumers’ appetite for the latest, coolest electronic gizmo — which, for the past few years, has meant Internet-connected smart devices. ARM Holdings plc (ADR) (NASDAQ:ARMH)’s angle is its stranglehold on the low-powered chips that makes such things work, Apple Inc. (NASDAQ:AAPL)’s is its clever design and marketing that creates products customers yearn for.
Both firms have seen rapid growth. In the three years to September 2012, Apple Inc. (NASDAQ:AAPL)’s sales rose 53% per annum, and ARM’s sales have grown 24% per annum over the past three years.
Both companies have a relatively high proportion of fixed costs, so margins have gone up alongside sales. Apple’s gross margin rose from 39% in 2010 to 44% last year. ARM Holdings plc (ADR) (NASDAQ:ARMH)’s operating margin doubled from 18% in 2009 to 36% in 2012.
As a result they’ve thrown off large amounts of cash while, as growth stocks, investors have no great expectations for dividends. That’s created surplus cash, though Apple Inc. (NASDAQ:AAPL)’s $145 billion cash pile dwarfs ARM Holdings plc (ADR) (NASDAQ:ARMH)’s 500 million pounds.
There are some parallels in the firms’ management. Apple Inc. (NASDAQ:AAPL) tragically lost its visionary leader Steve Jobs. His deputy, Tim Cook, was seen as a safe pair of hands but has since been criticized for a slow-down in produce innovation and a couple of marketing stumbles.
ARM Holdings plc (ADR) (NASDAQ:ARMH)’s boss, Warren East, is stepping down in two months, thankfully not through ill-health. He’s identified with creating ARM as it is today and his decision to pursue low-powered chips was transformational, if not “visionary.” East is being replaced by his deputy.
There’s one big difference. Apple Inc. (NASDAQ:AAPL) has demonstrated the stock market’s law of gravity. Its shares tumbled from $700 to $400 when the company’s growth tailed off.
Smartphones and tablets are still powering fast growth at ARM Holdings plc (ADR) (NASDAQ:ARMH), but logic suggests that when that generation of products reaches maturity, the company will face tougher competition in new product areas. Intel Corporation (NASDAQ:INTC) could be ARM’s Samsung.
ARM’s shareholders may enjoy lots more upside, despite its hefty rating of 54 times expected earnings. But the lesson from Apple is that share prices can overshoot when investors imagine super rates of growth can last forever.
With Apple trading at just 11 times projected earnings, investors have possibly overshot in the opposite direction. Astute investors who took profits early might be tempted to take a second bite.
The article Is ARM Holdings Like Apple? originally appeared on Fool.com and is written by Tony Reading.
Fool contributor Tony Reading owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel.
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