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Shares in ARM Holdings (LSE:ARM) slipped by more than 6.6% today to 970.0, despite “a strong quarter” that produced revenues of £229 million and a net profit of £77.1 million. That is a 22% increase in revenue and a 34% increase in net profit. Even the board’s recommendation to increase its interim dividend by 25% didn’t seem to be enough to keep investors from following the rats down the mooring lines.
Shouldn’t the share price go up following a favorable report?
The answer is a resounding “YES!” However, there are two primary mitigating circumstances that occasionally separate the men from the boys.
- ARM revenues came in under the consensus market forecast of £235 million. Of the two reasons for the share price decline, I suspect that this had the lesser impact.
- The greater impact was more likely a response to external business conditions, particularly that Apple (NASDAQ:AAPL), a major user of ARM technology, expects to report revenues below market projections. Since Apple iPhones use ARM technology, some might expect a cascading effect on Apple suppliers. To that point, other Apple-related tech companies have taken hits today as well.
On Any Given Day there Can Be a Big Difference Between Company Performance and Its Share Price Performance.
That’s exactly what happened to ARM today. This is one of those occasions where smart investors focus on how a company is being run.
I’ve been saying for the past few days – a lot longer than that actually – that “even in the bad times, a good company can continue to not only weather the storm, but even return a profit.”
What we have witnessed today is a mild panic about a potential storm on market horizon precipitated by Apple. However…
Seeking the safest port in a storm does not mean abandoning ship.
What investors did today was abandoning ship. The decline in ARM shares and trading of 15.7 million shares, nearly four times more than average, clearly indicates far too many investors who are trying to escape the sector where a storm could be coming instead of boarding the safest ship. Of all the technology ships afloat, ARM offers what is, arguably, the best place to be.
By constructing a business model that is almost entirely based on licensing of intellectual property, ARM has a greater ability than most to weather inevitable technological storms. That is the reason I have always had an affinity for the company. Its model allows much more flexibility and enduring strength than most other techs, especially when it has to carry inventory that is only 0.20% of its total current assets. Compare that to a random company like Rolls Royce (LSE:RR.) whose inventory is roughly 24.7% of its total current assets.
Whilst ARM owns 95% of the entire smartphone chip market, “to reduce its reliance on smartphones, ARM is emphasizing commercial opportunities in the so-called Internet of Things, or the plethora of connected devices that track activity and data, such as cars, lamps and health-monitoring wristbands. It is also positioning itself to take a share of the lucrative computer-server market from Intel Corp.”
While, for me at least, the drop in ARM’s share price makes no sense whatsoever, it does, as one analyst suggested, create a buying opportunity.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
