What do you consider a "fair" price for ARMHY?
Tough question. I knew at $2 and $4 it was whoefully underpriced. At $7???. I have a discounted free cash flow model that puts ARM at fair value at around its present valuation. I thought that model was somewhat conservative, not as conservative as the QCOM model, but still conservative. So on that basis $7 is fair value.
However, I do not have the industry knowledge, or insider knowledge that they have at ARM to put together a more detailed and accurate pro forma. It looks like to me ARM has a decade long or more of MSFTian (like, not exact but like) growth as the world goes digital, ARM royalty rates increase, ARM9 and 11 become more prevalent, concentration of ARM cores per unit increase, 8 bit migrates to 32 bit (read some articles on this lately already becoming a noticeable trend), and everything going digital.
This said, from any standard metric, P/S, P/E, P/Cash flow, ARM is frothy. The mildest valuation I can derive is ARM's free cash flow run rate to its enterprise value of around $2 billion. Which is 40x enterprise value/run rate free cash flow. No one is going to say that is cheap.
In the end, if it is a Gorilla (and I think ARM is), I will hang on to it until I can no longer justify its valuation. Since my DCF model easily justifies the valuation using what I consider conservative figures, I will keep holding it.
Will I buy more at this price? Since it already dominates my portfolio, I am not jumping the gun to. I have heard technicians say that ARM has constantly fallen to its 50 day moving average, and bounced from there. So perhaps if it falls to its 50 day moving average and I have cash on hand at the time, and see nothing I'd prefer to buy, then yes.
Conclusion, I can easily justify its present valuation, but I am not telling anyone that ARM is "cheap" or a "bargain", it may indeed be fairly valuated for long-term growth at present. But if I buy more ARM I think I will wait until it falls to its 50 dma.
Tinker |
