Today I am explaining why I believe ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) could be in line for a severe share price plummet.
546.2 million
Long-running concerns over slowing demand across the technology market were fanned last week following a sales warning from US-based Microchip Technology.
The business which manufactures chips for a wide range of products, from mobile phones and lighting through to smoke detectors lowered its sales outlook for the July-September quarter to $546.2m, down fromits previous guidance of between and$560m and $575.9m. And Microchip advised that the revenue miss was led by China where the September quarter is traditionally the strongest.
More worryingly the company suggested that this weakness is set to last, cautioning that we believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future.
On a brighter note for the global phone market, the launch of Apples iPhone 6 and iPhone 6 Plus in mid-September has beaten all expectations, with sales of 10 million units in the first weekend alone setting a record for any previous iPhone launch. But with demand across the entire industry showing signs of extreme slowdown, particularly at fellow tech heavyweight Samsung, the outlook remains murky at best.
35.3
The bad news over at Microchip Technology, not surprisingly, sent shares into freefall across the microchip-building sector. ARM Holdings itself slumped to 15-month lows around 822p per share following the news, although prices have since recovered some ground.
But share price pressure is nothing new for the company as persistent fears over slowing smartphone off-take in Western geographies, combined with a move towards cheaper models and subsequent effect on ARM Holdings royalties outlook, has prompted share prices to fluctuate.
The Cambridge-based firm has conceded 15% since the start of September, and such sudden share price movements are nothing new for companies which trade on elevated earnings multiples.
Indeed, ARM Holdings sports a P/E multiple of 35.3 times prospective earnings for 2014, soaring above the threshold of 15 which represents decent value for money. And this remains expensive at 28.7 times for 2015.
It is true that the companys recent stock market battering can be explained to some extent by the wider rout seen across the investment community in recent weeks. But given the patchy demand outlook for ARM Holdings key phone and tablet markets, shareholders should be prepared for further share price wobbles.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings and owns shares in Apple. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
