ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) shares have fallen by 21% from their 52-week high of 1,112p — so is it time to buy, or should shareholders cut the risk of further losses, and sell?
I’ve been taking a closer look at some of ARM’s key financial metrics to see whether ARM now rates as a buy.
1. 36
ARM currently trades on a 2014 forecast P/E of 36. A year ago, ARM shares traded on an equivalent P/E ratio of 84, but a falling share price and rising earnings have combined to bring the firm’s P/E rating down to a more reasonable level.
For the first time in some years, ARM’s share price looks realistic, against the firm’s expected earnings growth — so on this basis, the firm’s shares now look like a hold, to me.
2. 159%
ARM’s dividend has risen by 159% since 2008. Sadly, that still leaves it at just 5.7p per share — which equates to a paltry 0.65% yield.
The only people gaining any meaningful benefit from ARM’s dividend are long-term holders, who benefit from a much lower yield on cost. If you bought ARM shares for 110p in 2009, for example, you’re now enjoying a 5.2% yield on cost, in addition to a 691% capital gain.
Consensus forecasts suggest that ARM’s payout may rise by around 20% during each of the next two years, but even so, the firms’ yield will remain below 1%, making ARM shares unattractive from an income perspective.
3. 2.9 billion
In the first quarter of this year alone, 2.9 billion ARM-based chips were shipped — an 11% increase on the same period last year. These two numbers provide some indication of the potential ARM offers, but also the scale of the challenge it faces to remain on top of its game.
My concern is that ARM’s fat profit margins will eventually attract new competition, either from existing players, such as Imagination Technologies, or from a disruptive newcomer — the kind of company that ARM once was.
The next ARM?
ARM’s share price is more realistic than it was a year ago, but in my view, a lot of growth is already priced into the stock, and substantial gains look unlikely.
I believe it’s time for long-time ARM investors to follow the example of the company’s management and cash in some of their holdings, to free up money for new growth investments.