by Timothy Lutts, editor Cabot Stock of the Month
ARM Holdings (ARMH) doesn't make anything. Yet it has annual sales of $872 million, thanks to licensing of its intellectual property.
thanks to a business model that's low on physical investment, the
company's after-tax profit margins have averaged a plump 36% in the past
year! As a result, ARMH has a market cap of nearly $17 billion! Yet I
think it will get much larger!
ARM's business, which is well known to many investors, is designing
semiconductors. It has expertise in chips for computers and digital TVs,
but the big market, and the fastest-growing market, is the one for
mobile phones, where ARM is dominant.
[Related -Google Inc (GOOG): Has Android Swallowed A Grenade?]
also big in tablets, a category that is growing like wildfire. Odds are
extremely good that the company will be able to continue billing itself
as "the world's leading semiconductor intellectual property (IP)
supplier," in part because it's difficult for a customer to shift once
it's committed to working with ARM.
For its part, ARM boasts
that its designs have the best combination of reliability, low power
usage and compactness. And as mobile devices continue to proliferate,
taking market share away from desktop and laptop computers, the
advantages of ARM's designs in keeping weight down and battery life up
are a powerful draw.
Now, the success of a business does not
guarantee the success of a stock, but I have great expectations for ARMH
because of its chart.
[Related -Metlife Options Active As Company Ups Quarterly Dividend]
It climbed strongly from the market's
2009 bottom through 2010 and into the summer of 2011, where it entered a
long trading range between $22 and $30, as it performed slightly worse
than the market, on average.
It stayed in that range for 22 long
months! And then came this year's third quarter earnings report, where
management revealed that business was booming.
stampeded on board, spiking the stock up and out of that trading range
and kicking off a new uptrend that I believe has far to go. The past
three weeks have seen the stock pause between $36 and $37 and I think
that's a decent entry point.