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HEXUS.sharewatch: ARM down again, is the bubble deflating?

by Scott Bicheno on 25 October 2010, 12:26

Tags: ARM

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Despite it being the middle of earnings season, the weekly movement of our list of tech shares was relatively light. But a couple of stocks that have become emblematic of the speculation surrounding the growth of the mobile Internet - Apple and ARM - were down.

Whether this speculation can fairly be called a bubble depends on which stock you look at. It's hard to argue that Apple's shares, expensive though they are, are overvalued because the tech giant keeps announcing record quarters. But can the same be said of ARM?

One commonly used measure of the relative price of a stock is the price-to-earnings ratio, or P/E. This figure divides the price of the share by the annual earnings per share, and tells you how many years it will take for you to earn back the cost of buying the share.

According to Wikipedia, a ‘fair' P/E is considered to be in the 10-17 range, with anything below that implying investors have a pessimistic view of the future earnings growth potential of the company, and above the converse. To provide a snapshot of how some shares associated with the mobile Internet are valued, and thus whether there is a speculative bubble, here's a list of some P/Es:

 

Company P/E ratio
AMD 4.26
Apple 20.3
ARM 79.3
Google 24.79
HP 11.98
Intel 10.67
Microsoft 12.05
NVIDIA 29.56
Qualcomm 23.24

 

As you can see, many of the companies that have a strong investment in the mobile Internet have P/Es in the 20s. That's optimistic, but not bubble territory. Many of the ‘old' tech companies like HP and Microsoft are more conservatively valued, while AMD clearly still has a lot to do to convince investors.

But the stock that has an astronomical P/E is ARM, which has seen its share price increase five-fold since early 2009. It's easy to understand why it's such an investor darling: it provides the instruction set and many of the designs for the processors in smartphones, and smartphone sales have gone exponential. ARM clearly has a bright future.

But many of the key mobile chip makers, such as Qualcomm, do little more than license the instruction set from ARM, and design the chips without any other help from the UK outfit. ARM's business model relies on licensing and royalty revenues from its chip designs and if other companies, such as Apple, move in the direction of designing their own, current valuations will be hard to justify.

 

Company Listing Share price 4/10/10 Share price 11/10/10 Share price 18/10/10 Share price 25/10/10 7-day change Market cap (bn)
AMD AMD 7.05 7.05 7.12 6.89 -3.2% 4.65
Apple AAPL 282.52 294.07 314.74 307.47 -2.3% 281.63
ARM ARMH 19.25 18.36 18.86 18.42 -2.3% 8.11
Avnet AVT 26.84 27.51 27.63 28.80 4.2% 4.37
Cisco CSCO 21.91 22.48 23.36 23.48 0.5% 131.14
Dell DELL 13.04 13.69 14.49 14.59 0.7% 28.36
Google GOOG 525.62 536.35 601.45 612.53 1.8% 195.22
HP HPQ 40.77 41.15 42.82 42.87 0.1% 97.22
IBM IBM 135.64 138.85 141.06 139.67 -1.0% 173.19
Ingram Micro IM 17.08 17.41 17.76 17.79 0.2% 2.79
Intel INTC 19.32 19.52 19.32 19.83 2.6% 110.44
Microsoft MSFT 24.38 24.57 25.54 25.38 -0.6% 219.61
Nokia NOK 10.31 10.83 10.88 11.06 1.7% 41.42
Nvidia NVDA 11.35 10.86 11.29 11.80 4.5% 6.77
Oracle ORCL 27.24 28.00 28.90 28.99 0.3% 145.75
Qualcomm QCOM 44.26 44.76 44.79 44.18 -1.4% 70.92
Tech Data TECD 40.19 40.99 42.12 42.88 1.8% 2.00
Dow .DJI 10829.68 11006.48 11062.78 11132.56 0.6% N/A
FTSE 100 .FTSE 5592.90 5657.61 5703.37 5741.37 0.7% N/A
NASDAQ .IXIC 2370.75 2401.91 2468.77 2479.39 0.4% N/A


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