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I love it when there are compelling reasons to invest in a company. Yesterday I wrote about Fastjet (LSE:FJET). The compelling reason to invest in Fastjet is its strategic objective to become the low-cost airline of choice in Africa. Having now established its first international flight, it is poised to succeed. Likewise, there are compelling reasons to invest in ARM Holdings (LSE:ARM). The first is its business model of designing products, not building them. The second is that it has targeted the ubiquitous mobile device market. The third is that its chip designs are in great demand.
ARM released its Q3 results this morning. The results were simply amazing (more about that in a second), but its shae price plunged 72 pence from 1,039.00 to 967.00 by 8:33 am. Conflicting headlines began to be published, including “ARM share price slides with royalty revenue disappointing,” and “Analyst hails ARM’s “staggering” licence results.” I’m going to go out on a limb here and say that, in principle, what happens in the 30 minutes after the market opens in response to report that was released an hour earlier, is not necessarily a result of the 7:00 am report. I stand by the little understood principle that “Cause and effect are not necessarily related in time and space.” Gamblers look at the cards currently face up on the table. Investors own the casino.
The Amazing Results
- Both Q3 and YTD revenues were 27% higher versus the same periods in 2012. Income for the quarter was £286.7 million (2012:£227.9). For the year, it was £814.9 million (2012:£650.3). That is amazing!
- Operating margin increased by four percentage points in both periods, to 48.6% during the quarter and to 49.2% YTD.
- Pretax profit was up 36% during Q3 (from £68.1 million to £92.6 million) and 37% YTD (from £196.6 million to £268.6 million).
- EPS increased by 38% in the quarter (from 3.71 pence to 5.11 pence) and by 44% for the year (from 10.63 to 15.30).
- The company signed a record 48 processor licenses, with “nearly half of the 24 licencees” being first-time customers.
- Royalty revenues “increased 14% year on year … outperforming the semiconductor industry by 16 percentage points.
The Amazing Response
Understand that this morning’s decline in ARM’s share price is supposedly in response to that last bullet point, because, despite the actual numbers, the revenue growth was “a smaller than estimated rise in royalty revenue.” To claim that the drop in share price this morning is a result of a smaller than estimated rise in royalty revenue is either an absurd statement, or those trading ARM because of that are clueless. For Pete’s sake, ARM outperformed the industry by 16 percentage points. To react negatively to a “smaller than estimated rise” is like buying a Lamborghini, then trying to return it the same day because, although you made it home in record time, you drove through some rain and the car got wet.
An Amazing Company
Arm is an amazing company built on an amazing concept, working on an amazing operating margin, with an amazing track record, generating amazing results.
CEO Simon Segars said that “With more customers choosing to deploy ARM technology in their products and ARM’s royalty revenues outperforming the overall semiconductor industry, this has been another quarter that underpins ARM’s long-term growth opportunity.”
Oh, and by the way … it is now just past 4:00 pm, and ARM shares are trading at 1033.00, a mere 6 pence below its opening price, yet 74% higher than 22 October 2012 when it was at 594.00. I like this company.
