US sell off hits ARM again

ARM felt the pain once again, following the most recent US sell-off. Down some 4.5% (at time of writing), the UK-based microprocessor designer is one of the worst performers on the FTSE.

This follows the hit to US equities yesterday (10^th April), which saw the technology-heavy Nasdaq decline a significant 3.1%.

That, in turn, came after gains seen in the middle of the week, following the previous sell-off; and just like that retreat, the highly-valued usual suspects felt the chill.

Indeed, yesterday’s technology players – including Amazon, Google and Facebook – took something of a knock. That’s in addition to biotechnology companies, such as Gilead, Amgen and Alexion.

As to be expected, the US sell-off, like before, spread elsewhere.

ARM, whose chip designs can be found in smartphones and tablets such as the iPhone and iPad, is just one of several technology-related companies this side of the pond to have ended up as a casualty.

ARM certainly sports a high valuation.

The chip designer’s valuation has undoubtedly been called into question over recent times. Its soaring shares over the last few years have ensured that, even with the recent dent, ARM trades at a hefty 42x expected 2014 earnings (and 17x expected 2014 sales).

For context, take Intel. Of course, the much larger Intel’s growth is nothing like ARM’s, in fact it’s stalled somewhat given its exposure to the turmoil surrounding declining PC sales.

Nonetheless, the US-based heavyweight’s been making notable progress in the lucrative mobile chips space (which ARM dominates) and it trades at around 15x expected 2014 earnings and some 3x expected 2014 sales.

That said, ARM’s good growth is there to be seen.

In February, for instance, the company reported fourth quarter revenue of $303m, beating expectations of around $290m, and representing a 15% growth over the previous year. Pre-tax profit increased 19% over the prior year, coming in at around $96m.

Looking ahead, the company anticipates full-year 2014 revenue to be in line with market expectations – average forecast comes in at some £821m, that’s around 15% growth over 2013 revenue.

Meanwhile, ARM has been taking steps (albeit not terribly significant at present) towards diversifying into new markets, which could help drive further growth in the long term.

Indeed, ARM’s long-term story seems sound enough but its arguably lofty valuation means it’s one of the first in line for a beating, as near-term jitters persist.

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