ARM (LSE: ARM) (NASDAQ: ARMH.US) has had a poor start to the year. After falling 14% year to date, the company’s shares have underperformed the FTSE 100 by, well, 14% this year.
The weakness can be attributed to the company’s poor sales performance during the first six months of the year. However, the second half should see sales recover and Arm’s shares are set to surge as a result.
Slowing down
Arm’s sales during the first quarter slowed, although they still grew at an impressive double digit rate. Indeed, total second quarter dollar revenues rose by 17% year over year, compared to 24% growth as reported during the second quarter of 2013.
Still, the technology company said processor shipments jumped 11% year on year as strong growth in enterprise networking and microcontrollers offset a slowdown in the smartphone market. Unfortunately, processor royalty revenue only ticked higher by 2% compared to the same period a year ago.
To some extent, this slowdown is to be expected. Arm cannot grow sales at 20% per annum forever, if they did the company would quickly take over the whole semiconductor market.
Nevertheless, despite the company’s poor first half, the future is bright for Arm.
Multiple releases
The semiconductor industry now works in cycles. For example, most companies release their new products, smart phones and tablets, during the second half of the year in time for the key Christmas trading period.
The combination of both Christmas, and new release buying, sends sales skyrocketing and Arm’s sales are no different.
Indeed, the company is really set to benefit over the next few months as Apple‘s new iPhone and iPad set to be launched during this period. Both of these products usually see strong demand, both at release and over the months following the release.
So, Arm’s sales should recover during the second half and this should renew investor confidence. Based on the fact that Arm’s share have traded at an average P/E of 52 for the past two years, if the shares return to this valuation, they would be worth 1,200p each — City forecasts are calling for earnings of 23p per share this year.
Get in early
There’s no denying that Arm has been one of the UK’s greatest growth stories of the past decade. However, right now the company’s shares are expensive and the group’s valuation leaves little room for error.
Indeed, right now Arm is trading at a forward P/E of 41, if the company misses lofty growth targets this valuation could come rapidly back to earth.
But there are other opportunities out there. The key, when searching for growth stocks, is looking under the radar. You want to get on board while the company is still an unknown quantity.
