One to watch

ARM designs processors and related technology, as well as selling development tools to chip manufacturers. Its proprietary software and process architecture is embedded in mobile phones, PCs and other equipment. ARM is emerging as a leader in this technology, with competitive advantages in smart phones, netbooks and internet tablets.

Licensing revenue growth should drive royalty revenues up from 50 per cent in 2009 to about 58 per cent of overall sales by 2011. By 2014, royalties could account for 65 per cent of ARM's total sales. Smart phones and tablets are likely to see volume growth over the next two years. Each of these use multiple ARM technologies, potentially driving margins up to 50 per cent by 2014. By then, software in netbooks and tablets could account for 11 per cent of royalties.

ARM's shares are highly rated in terms of p/e. However, on the basis of EV/EBITDA, the firm's rating is not excessive. The share price appears not only to discount the next three years of growth, but fails to recognise ARM's strategic value or its potential to become a major rival to Intel.

This article is for information and discussion purposes and does not form a recommendation by the manager to invest or otherwise.

British Airways

245p -6p

Broker says BUY

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62.55p +1.65p

Broker says BUY

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