Since the beginning of March, shares ofARM Holdings(LSE: ARM) have been on the slide as investors have become concerned about the companys outlook.
Indeed, over the past five months, ARMs shares have slumped by 27%, and according to one broker, there could be further declines to come.
Analysts at Liberum Capital believe that ARMs shares could fall another 26% to650p. However, Liberums forecast is the most pessimistic out there. 13 of the 29 brokers covering ARM currently rate the companys shares a buy, and only three have sell or underperform ratings on the shares. The average City analyst price target is 1,230p.
However, some City commentators are becoming concerned that ARMs growth rate is going to slow going forward.
Main rival
Intel Corporation, which has long been consideredto be ARMsmain rival, has finally got its act together. Analysts believe that the companys new high-performance, low-power chips could captureroughly 50% ofApplesmodembusiness in the upcoming iPhone due to launch September 9th.
This isnt the end of the world for ARM. Intel may be poised to grab a tiny fraction of the smartphone chip market, but ARMs products will still feature heavily in the majority of the worlds smartphones.
Whats more, the company is starting to muscle in on Intels server chip market, a market that the tech behemothhas enjoyed a monopoly over for some time.
Breaking in
ARM decided to try and break into the market for server microchips at just the right time. Amazon, Facebook, Google and Chinese tech giantAlibaba Group, are all aggressively expanding their cloud computing offering, and building data centres is a core part of developing cloud capacity.
Historically, Intels has dominated the market forserver computer chips, but now ARM is starting to muscle in.Alibaba Group is moving more and more to servers using chips based on ARMs instruction set architecture, instead of Intels.
Whats more, City analysts believe that Foxconn, the electrical contract manufacturer is designingand building an ARM-based server. Also, other analysts have heard talk thatAmazon, Facebook and Google are working on ARM-based CPUs for servers.
So, it looks as if ARM is poised to grab an enormous share of the server chip market from Intel. This diversification should reduce the companys dependence on the smartphone market and help drive long-term growth.
Moreover,alongsidethe companys expansion into the server market, ARMis expanding into the internet of things (IoT) market, where its high-performance, low-power chips are in demand.
In demand
ARM signed a record 54 new processor licences during the second quarter of this year as IoT technology really started to take off. Much of the financial benefit from these deals will come in later years.
Still, the figures show that ARM is working hard to diversify away from its traditional smartphone market.
And after recent declines, ARMs valuation has come down to a level which makes the companys shares look extremely attractive to growth investors. The company currently trades at a forwards P/E 29.8 and earnings per share growth of 68%isexpected this year. These figures suggest that ARMs shares are trading at a PEG ratio of 0.4.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings, and owns shares in Google & 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.
