James Moore: Is paying a heftypremium for chip firm Arm a signof tech madness?

Investment View: The problem is that there is a real dearth of quality technology companies on the London Stock Exchange

Arm holdings

Our view Buy on weakness

Share price 592.5p (-7.5p)

Sometimes it is worth paying a premium because even though the economy stinks, cheapest isn't always the best.

But however good the product is, there does come a time when the numbers just don't add up; when the premium is just not worth paying compared to the competition.

Has Arm Holdings reached that point? The chip designer certainly deserves a top rating. If you have a smartphone (and most people have), there's a good chance that there will be an Arm chip inside it.

And that's not all. Arm has been designing chips for a new generation of toys produced by Lego (fathers will drool) while also boosting the power of tablet computers. Then there's the excitement brewing about (Microsoft) Windows on Arm, a story which analysts expect to really get going next year. Arm chips are, in fact, colonising our lives without our having noticed it.

No surprise then, that the company is something of a moneymaking machine. It gets a royalty from each chip sold (existing designs provide about half of its revenues) in addition to what it makes from the sale of new licences.

Competition is a concern. A certain Intel would like to snatch some of Arm's smartphone market share, and there has been growing interest in the latter's Medfield chip. But analysts argue (while admitting that comparing chips isn't all that easy) that Medfield still doesn't quite match up to the best Arm can do.

With all this being the case, you'd expect Arm shares to carry a premium. That they certainly do. On 6 March the stock hit a six-month low of 535.5p. The shares have been on a tear ever since and now trade on about 43 times this year's forecast earnings, with a prospective dividend yield of 0.7 per cent.

Tech madness? A premium so big it is time to switch into something different? The problem is that there is a real dearth of quality technology companies on the London Stock Exchange. Part of the reason for Arm's premium could simply be its rarity value, although even on a more technology rich market it would still stand out.

It remains shamefully expensive for UK investors to deal in overseas stocks and dollar companies carry currency risk (although there are a number of dollar stocks, notably HSBC and the oil majors, on the London market).

But how about America's technology stars?

Arm's main claim to fame is that its chips are used by Apple. If you have an iPhone, you are a customer. At more than $600 a pop, Apple's shares appear to be expensive, but based on the company's earnings they are not. The company trades on just over 14 times 2012 forecast earnings (its year ends in September) while yielding even less than Arm (although the company has only just commenced dividend payments).

What about that potential threat to Arm's dominance of the smartphone market? Intel trades on 11.5 times full-year earnings, with a forecast yield of just over 3 per cent.

Of course comparing these two behemoths with the much smaller, faster-growing Arm is rather like comparing an apple tree to a small orchard.

All the same it does illustrate just how pricey Arm's shares are.

Arm produces high-quality product and has continually performed better than the City's expectations. Even during the depths of the financial crisis the shares still traded at multiples in excess of 20. As for the August wobble last year? They were trading above 30 times.

That said, there is premium and there is ridiculous.

For the really exciting growth you needed to be in Arm a couple of years ago. The company is still a good one for a portfolio and some analysts think the shares could hit 690p. But I'd be reluctant to get involved at the current level. In my view Arm would be interesting at around 550p and the stock could be due to ease on profit-taking if the forthcoming results are merely very good as opposed to spectacular. Steer clear for now but buy on weakness.

News
people'It can last and it's terrifying'
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
Sport
footballStriker has moved on loan for the remainder of the season
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
Arts and Entertainment
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
News
The five geckos were launched into space to find out about the effects of weightlessness on the creatures’ sex lives
i100
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
ebooksAn unforgettable anthology of contemporary reportage
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
News
i100
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Arts and Entertainment
Word master: Self holds up a copy of his novel ‘Umbrella’
booksUnlike 'talented mediocrity' George Orwell, you must approach this writer dictionary in hand
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

£40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, Data Warehousi...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering