Is ARM Holdings plc The Best Company In The FTSE 100?

Over the past five years, ARM (LSE: ARM) (NASDAQ: ARMH.US) has outperformed the FTSE 100 by 382% excluding dividends and it’s likely that this performance will continue.

You see, ARM is a near-model company for me. The group is innovative, cash-generative, a leader in its field, produces a high return on equity and is currently sitting on a huge pile of cash — five of the most attractive traits any business can have.

For these reasons, investors are more than happy to pay a premium for the company’s shares. Indeed, at present levels ARM is currently trading at a forward P/E of 45.3, although after stripping out cash this figure falls slightly to 42.8. 

What does the future hold?

There’s no doubt that ARM’s performance over the past few years has been nothing short of impressive. But what does the future hold for the company?

Well, as the company now dominates the smartphone microchip market, ARM is now looking to dominate the Internet of Things (IoT) market. A key part of this strategy is ARM’s ARMv8-A technology, designed for high-power computing. Management decided to give away some ARMv8-A software to manufacturers of smart devices last year in order to gain a foothold in the IoT market before competitors could disrupt the market. 

And as part of its plan to dominate the IoT market, ARM announced today the acquisition of Offspark, a Dutch firm that specialises in security software for the Internet of Things. 

Security is becoming increasingly important to manufacturers of smart-devices as the number of household appliances connected to the internet increases. Or as Paul Bakker, Offspark’s chief executive, put it:

“Security is the most fundamental aspect in ensuring people trust [Internet of Things] technology and that is only possible with a truly tailored solution…”

This move by ARM should put the company ahead of its peers in the IoT arms race.

Market leader 

As well as the IoT market, ARM already dominates the world’s smartphone market, a market that’s set to grow rapidly over the next decade or so. 

In particular, the Chinese smartphone market is only just starting to grow. A report from IHS Technology states that sales of smartphones in China hit 72.4m units last year, up from just 4.6m during 2013. Shipments are set to double again to 144.1m units during 2015, rising to 219.8m in 2016 and 298.5m by the end of 2017. ARM is in the perfect position to benefit from this kind of growth.

And overall, an increasing number of smartphone shipments, along with ARM’s presence in the IoT market, has lead City analysts to conclude that ARM’s earnings per share will nearly double by 2017. That’s a rate of growth that’s worth paying a premium for.