Quick Take on Arm Holdings plc

“Dude, what do you think of ARMH?”

“Is that the company with tablet chips that Microsoft (MSFT) said it would develop applications for?”

“Dude, I don't know.  There was some big news today.  What do you think?”

Here was my response:

On the basic quantitative level, nothing stands out about ARM Holdings plc (ARMH).  Digging a little deeper, we see that ROIC is likely to increase over the next few quarters from an already healthy 13.3% to our forecast of 16.8% by December 2011.   But you are paying a lot for that growth — a 3.2x PE-to-growth ratio on CY2011 EPS of $0.41 and a consensus 5yr growth rate of 13.5%.

If you want to buy a growth stock, investors are much better off buying an Amazon.com Inc. (AMZN).  If you want to buy a mid-cap low-power chip stock, investors are probably much better off buying a NVIDIA Corp (NVDA).

With AMZN you are only paying 1.8x EPS/28% expected growth.  With NVDA you are only paying 1.3x EPS/15.5% expected growth.  Note, these 5yr forecasts are almost always wrong but they are a place to start.

ARMH may have a nice story, but it seems like there are better risk/reward alternatives out there.  I would even suggest shorting ARMH against a long position in NVDA.