ARM's Strength

When comparing the use of shareholder wealth maximisation vs. profit maximisation, the benefits are clear.  Shareholder wealth maximisation increases the ability for manager to focus on the long term future of the business, against the myopic [short term] view that profit maximisation can often encourage.  Nevertheless, profit maximisation can in turn fuel the success of shareholder wealth maximisation, as well as other elements, such as increasing sales, increasing market share, etc.  However, shareholder wealth maximisation is an interesting use of words.  The term wealth can be interpreted differently, especially in regards to shareholders.  Do they believe that the company they have invested their hard earned money into, should pay them proportions of the company’s profits? Or, alternatively, invest the profits wisely in order to generate greater value for their shares? 

In 2008 ARM Holdings, currently the world's leading semiconductor intellectual property supplier, celebrated the 10 billionth processor chip shipped.  Since then, ARM’s shares have outperformed their industry.  With some people calling it the ‘iPad effect’, ARM can partially thank Apple's iPhone and iPad for their recent success, with ARM recently declaring that annual profits jumped to £157m from £110m.  However, one of ARM’s biggest threats is that of Intel (the world’s largest semiconductor chip maker, based on revenue) declaring potential entry into the mobile phone industry with a partnership with Google.

“ARM's strategy is for our technology to gain market share in long-term structural growth markets, such as mobile phones, consumer electronics and embedded digital devices.”

With no mention of shareholders, one would wonder why invest.  However, surely an increase in market share will increase share price and in turn shareholders' are happy, yes? No!!! ARM holdings are adopting a 'growth stratergy', which aims to increase sales/revenue, capture market share and beat the competition.  By focusing too much into gaining market share, ARM holdings could be neglecting such elements as profit margins. This combined with the type of industry ARM are in, which requires vast amounts of capital expenditure due to high R&D costs and costly high tech machinery, could leave ARM with reduced capital, increased debts and additionally falling share price. 

Nevertheless, a picture speaks a thousand words.  Since 2008, ARM Holdings plc has clearly outclassed its industry.



(London Stock Exchange, 2012)



However, with the recent success of ARM, share prices have increased a further 7pc with the news that;

Steve Ballmer, Microsoft’s chief executive, announces plans to base the next generation of Microsoft’s Windows operating system on microchips designed by ARM.

Does this all sound too good to be true?  I think so.  I believe the share price of ARM maybe accountable to 'valuation premium'.  An article published by Morningstar states that the research that Brain Colello has carried out, shows the market is overvaluing ARM Holdings.  Mr Colello believes that the firms profitability could come crashing down if ARM does not live up to their lofty expectations.

As I have stated previously, Intel are the main threat to ARM.  Intel are taking a slightly different approach with regarding the development of chips for mobile handsets.  While ARM's directors and financial managers are investing in the R&D and technology for more processing power, Intel are striving for a more energy efficient chip.  With such powerful and dominant forces going head to head in one of the most lucrative markets, this will be an interesting few years for ARM.