ARM is growing up and has considerable brand value to add on as it matures, on top of the value it adds as it grows by revenues and profit.
The April 2014 multiples were fairly high, then there was a correction of 12.5% below 5 year trend line.
But my target for ARM’s share price in 4 year’s time is £25-£30+, hitting these levels in at least one pre-emptive spurt before that time, given the typical volatility of the price.
Why, in summary?
I assume conditions remaining roughly the same in the longer run in terms of attitudes to financial ratios. The company will likely grow at least 20% a year given the market outlook for the current and new areas it sells into. On top of all that, it will add intangible value like better-known global electronics and ICT brands have done (see E&T Magazine April 2014 for brand value increases in electronics and IT). This intangible brand value will affect the share price directly, but may also help maintain or increase royalty and licensing fee rates that ARM can command.
Top 6 reasons:
1. has a beautiful business model involving tech licensing and royalties in high barrier, deep tech.
2. is yet fully to exploit its brand and go confidently shoulder to shoulder with the big guys who have the big, rapidly growing brand values in electronics and ICT. But it is beginning to do this through market diversification, corporate marketing, supply chain management and internal cultural development: remember Apple was its first customer!
3. has a beautiful strategy to push further into the markets it currently dominates (smartphones, which Analysts at IDC say is growing at 28.9% p.a.) – because those markets are still growing and the number of chips per phone is increasing while the phones get priced cheaper for global emerging markets.
4. is consistently growing itself on average at 15-20% a year, and has been for at least 4 years.
5. new markets are amazing, pretty much exponential, such as IoT (MCUs, radio, sensors, embedded) and ARM is better placed than anyone to exploit them and benefit from their general take-up.
6. any competitors that threaten are more likely to drive up the ARM share price if they succeed, as they might for a time be in a position to buy ARM, but it more likely that ARM will grow and become a feisty global brand, an icon of the knowledge economy in the next decade.
7. ARM’s price rose an order of magnitude in the past 5 years; these targets represent a considerable slow down in those timescales.
8. is investing not only in great R&D staff, but is also expanding its global marketing campaigns: innovation AND marketing.
So I am not moved by this little bump has happened because of a regrade by an investment bank and by a general forum about tech share levels. They bear no resemblance to 1999 in absolute financial ratio terms; and ARM bears no resemblance to a revenueless, USP-less dotcom.
In the big picture, you have a superb business, and the medium-term is looking excellent.
Cambridge Investment Research (CIR Strategy) is an independent consultancy trading since 2002. Its Company Director, Justin Hayward MMath MBA PhD is invested in ARM. Justin Hayward, 45, is a former Hawking PhD student (early 90s) and a former Deutsche Bank quant relative value analyst (late 90s).
This note is not a recommendation to buy or sell a security.