It has been one year since Apple Inc. (symbol AAPL on Nasdaq) unveiled its iPad tablet computer. This device is a complete personal computer that uses a touch screen instead of a traditional keyboard. That makes it more portable and easier to use than a traditional laptop.
Apple sold roughly 300,000 iPads on the first day the device was sold in U.S. stores. The iPad continues to be a very strong seller for Apple: In its latest quarter, the company sold 7.3 million iPads.
In response to the ongoing popularity of the iPad, other technology stocks, such as Research in Motion and Samsung, are preparing to launch new tablet computers of their own in the coming months.
Look to technology stocks that make chips for tablet computer profits
There are a number of ways to profit from the rising popularity of tablet computers and other mobile devices. The obvious way is to buy shares of tablet computer makers directly.
However, another approach is to buy shares of chipmakers, like Intel and Texas Instruments. Many of these technology stocks are investing heavily in new chips for mobile devices, including tablet computers. However, their chips are also used in a wide range of other applications, from DVD players to kidney dialysis machines. That broad range of business helps lower their risk.
A member of Pat McKeough’s Inner Circle recently asked for our advice on chipmaker ARM Holdings plc. The technology stock’s chips are used in a wide range of devices. Moreover, its chips are highly energy efficient. That’s part of the reason why Apple is currently using ARM’s technology in the iPad.
To give you a sense of how our Inner Circle service works, we’d like to share this question, and our answer, with you. We hope you enjoy and profit from it.
Q: Pat: with the growth in the tablet computer market could I have your opinion on a British firm: ARM Holdings plc? Thanks again.
A: ARM Holdings plc (ADRs), $25.04, symbol ARMH on Nasdaq (ADRs outstanding: 440.4 million; Market cap: $11.0 billion; ir.arm.com) designs chips and software for a wide variety of electronic devices, including cellphones, network routers, digital cameras and automobile-control systems.
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The Cambridge, U.K.-based company does not make its chips. Instead, it earns royalties by licensing its technology to makers of electronic products. The technology stock’s major customers include Nokia, Sony, Samsung and Nintendo. Apple is also using ARM’s technology in its A4 processors, which power its new iPad tablet computer.
ARM continues to post rising sales and profits. In the three months ended September 30, 2010, the technology stock’s sales rose 28.5%, to $158.1 million from $123.0 million a year earlier. Earnings per ADR rose 52.5%, to $0.98 from $0.64 (each American Depositary Receipt represents three ARM common shares). ARM is debt free, and holds cash of $398.1 million, or $0.90 per ADR.
The company spends a high 38% of its revenue on research. It must write off these expenses immediately, which hurts its profits. However, new products from this spending help ARM compete with larger chipmakers, such as Intel and Advanced Micro Devices (AMD).
For example, its new Mali graphic chips greatly enhance the displays of mobile devices. Samsung has agreed to use these chips in its tablet computer.
Offsetting these positives are some potential risk factors for the company. For example, ARM will face new competition when Intel releases a new version of its Atom chip. As well, AMD’s new Fusion chips, which combine processing and graphics functions on a single chip, could hurt ARM’s growth.
The stock has risen sharply from a year ago, when it traded at $8 a share. It now trades at over 71 times the company’s latest 12 months of earnings.
Our buy/sell/hold advice on ARM, based on the company’s current market position and the prospects for tablet computer sales, is only available to members of our Inner Circle. You can’t get it anywhere else! (Note: If you are a current Inner Circle member please click here to view Pat’s recommendation. Be sure to log in first.)
If you’re looking for authoritative advice on investment issues, or fundamental analysis of stocks you’re considering buying (or selling), you should join Pat McKeough’s Inner Circle. It’s Canada’s most exclusive investment group.
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