Can a Bionic ARM Still Pay Off?
Qualcomm(QCOM) to new heights. The surprise performance of these chips shows how strong Apple's famed "halo effect" really is.
One name that has become very prominent is ARM Holdings (ARMH) . Unlike rivals that also get rewarded from exposure to Apple devices, ARM has decided to play the role of the "sneaky diplomat" by also licensing its chip technology to the highly anticipated launch of Microsoft's(MSFT) Windows 8.
But the question is, for a stock that is already grossly expensive, how much more upside is there for ARM, regardless of how successful Microsoft's launch might be? Or more appropriately, can a "Windows effect" produce more than an ARM's-length of growth -- at least to the extent it can justify a higher stock price?
As impressed as I am with ARM's business model and the fact that it is able to forge deals with competing companies, its stock price suggests it is priced for perfection and for me this has always been a great source for concern , much less thinking Windows 8 can wring out some untapped value.
Its enormous price-to-earnings ratio of 55 implies that the company already has huge expectations to fulfill. I just don't think that Windows 8 will be enough to help it grow into that multiple -- at least not with any noticeable urgency. That said, I wouldn't completely rule out the company's investment worthiness -- at least not without a look at its recent earnings results.
The Quarter That Was
For the period ending in March , the company reported revenue of $209.4 million -- representing an annual increase of 13% -- well ahead of analysts' estimates of $201.2 million. The company also beat estimates on earnings per share of 16 cents.
For the quarter, gross margin arrived at 94%, 30 basis points better than the prior-year quarter. Operating margin was 37.9%, 12.9% better than the prior-year quarter, while net margin registered at 28.2% or an improvement of 9.7% sequentially.
When analyzing the report I took some good with some bad. For a stock that is priced for perfection as is ARM, any sign of weakness will draw a red flag. So I have no shame in admitting that I also scoured for "less than perfect" examples on its report.
One such discovery was the fact that although the company logged a 13% increase in revenue from the previous year, that was still 4% below the previous quarter. It's far too early to suggest what that might mean, but I was also unimpressed by its paltry 6% growth in royalties.