Earnings growth point to a stronger ARM

ARM’s share price performance has not matched its earnings growth, but better times lie ahead.

ARM logo held up by Android figure
Source: Bloomberg

For a darling growth stock, the company's performance so far this year has been unimpressive. Granted, its 3% gain has outperformed the broader market, but that is hardly an achievement at present. Nonetheless, there is still an expectation that the firm will do well in the coming year.

Forecast earnings growth is expected to be 29% during this year, and 20% in the following 12 months. As a means of playing the growth of Apple, ARM is still unrivalled. In addition to this, the firm has expanded into the ‘Internet of Things’ revolution, creating a new product called Core Radio IP that will give it an edge over rivals.

ARM’s earnings multiple has never been modest – at a current PE of 53.8 the firm is much more expensive than the wider market, which trades on a current PE of 15. But investors have been rewarded for their faith in the firm, which has continued to grow revenues in recent years, helped by its very close relationship with the Apple titan.

ARM shares have rebounded back above the 200-day simple moving average (£10.33), having been in a steady retreat since they failed to hold at the £12 mark back in March and April. It is worth bearing in mind that the correction came after a gain of 55% between October 2014 and March 2015.

The shares now need to fill the gap created by the lower open on 29 June, ideally combined with a close back above the £11 level. Upcoming results should point to further growth, with a first target of £12 that will then put them on course to reach fresh all-time highs.

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