When I think of semiconductor intellectual property (IP) supplier ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Market position
In 1990 Advanced RISC Machines (ARM) spun out of Acorn and Apple Computer’s collaboration efforts with a charter to create a new microprocessor standard. Well, almost two-and-a-half decades later, if the company’s sales figures are anything to go by, it seems that the original vision has been achieved.
ARM describes itself as providing the architecture for the digital world. The firm is the world’s leading semiconductor intellectual property (IP) supplier and, as such, its offering is at the heart of the development of digital electronic products wordwide. The company licenses its technology to leading semiconductor manufacturers who incorporate ARM’s chip designs alongside their own technology to create smart, energy‑efficient chips suitable for modern electronic devices such as smart phones. It’s cracking business, and ARM’s healthy-looking margin, running above 49%, testifies to the resilience of the economic niche the firm has settled into within today’s world of digital everything.
Escalating consumer demand for inter-device connectivity is driving accelerating growth and margins have been improving despite their strength.
2) Strong balance sheet
As a result of the business qualities outlined above, ARM enjoys a rock-solid balance sheet. At the last count, the firm had a net cash-pot of around £567m, roughly equal to annual turnover and around three times yearly operating profit.
Such a healthy rainy day fund buys the company time to address any business challenges that might come along and reassures investors that financial troubles will not sink any investment in the company.
What now?
ARM enjoys a robust market position underlined by recent improvements in operating margin. However, should earnings growth or margins start to slip, the firm’s P/E rating could adjust downwards, although the outlook is good now.