It feels as though it’s impossible to escape the new iPhone from Apple (NASDAQ: AAPL.US), with seemingly every news channel and media outlet talking extensively about it.
Furthermore, the fact that it uses a chip designed by ARM (LSE: ARM) (NASDAQ: ARMH.US) has received relatively little focus. However, I think that the real winners from the launch of the iPhone are investors in ARM and not necessarily investors in Apple.
Indeed, much of the talk has surrounded the fact that Apple has launched two phones simultaneously: the 5S and the 5C, with the latter being a lower-priced version that comes in a variety of bright colours.
Of course, the advancement in the 5S is, in my view, largely a result of the chip it uses. This chip is designed by ARM, a UK-based leader in microprocessor intellectual property, which receives a royalty on every iPhone sold as a result of its designs being incorporated into the phone.
So, if Apple wins with the iPhone, ARM wins as well.
However, I believe that (of the two companies) ARM is a better investment than Apple. Certainly, Apple is more widely known than ARM and has a long track record of successful product launches.
The problem, though, is that Apple relies on ARM for intellectual property and, in my opinion, is little more than a slick marketing machine that comes with a hefty valuation.
Indeed, Apple trades on a price0-to-earnings (P/E) ratio of just 11, which seems to be very cheap. However, market forecasts are for a decline of 11% in earnings per share (EPS) for the current financial year and for an increase in EPS of 9% for the following year. In other words, EPS is forecast to be slightly lower over the next couple of years.
Shareholders in ARM, though, have considerable growth to look forward to according to market forecasts. EPS is expected to increase by 40% this year and 23% next year, giving an annualised growth rate of 31%.
Therefore, the price-to-earnings to growth (PEG) ratio for Apple is roughly 11 (assuming no growth), while for ARM it is a far more appealing 2.
So, while Apple shareholders will receive the headlines, it looks as though ARM shareholders may be the ones receiving the profits in a year or two’s time.
Indeed, ARM has an innovative workforce, sky-high margins and the potential to grow at a quite astounding rate over the next couple of years. That’s why I think it is a really attractive growth stock.
