Turkey of the week: over-hyped chip-designer

This microchip designer produces first-rate products, but has been subject of a lot of hype recently that has left the company overvalued, says Paul Hill.

Last Thursday I ran a stock screen on the FTSE 100 based on future earnings per share (EPS) estimates. I was rather surprised to discover that the most expensive equity in terms of the 2011 earnings was ARM, the Cambridge-based chip-designer. It is undoubtedly a great company. But is it really a great stock, having soared 275% from its 2009 lows of 79p to currently hovering near an eight-year high? I'm not sure.

ARM invents proprietary designs for microchips that are licensed (31% of sales) to manufacturers. Having created the intellectual property, ARM has the chips manufactured elsewhere. It then sells on the science to manufacturers who also pay royalties (54%) each time a device using its technology is sold.

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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.