Sexy Tech Make Me Interested In ARM Holdings plc

The Motley Fool

The new Apple iPhone 5S is fantastic. Of course, I don't own one (at the moment), but the general consensus seems to be that its 64-bit processor is streets ahead of anything else and allows the phone to run more advanced apps more quickly.

However, I do own various other gadgets as well as a smartphone, many of which (like the new iPhone) use an ARM (LSE: ARM) (NASDAQ: ARMH.US)-designed chip, with ARM receiving a royalty for each unit sold.

Indeed, the tech products that ARM is involved in tend to be among the higher quality and most advanced available, with the company partnering with the likes of Samsung as well as Apple; both of whom do not seem to struggle to sell large volumes of their products.

Not only does this mean that royalties are high for ARM, but that at the higher quality end its royalties are relatively higher due to the more advanced nature of the designs involved.

So, sexy products that are considered high-end do not only mean higher sales but a higher percentage of revenue per unit for ARM.

However, the attraction of the products in which ARM is involved is not the only reason I'm bullish on the company.

In addition, ARM is financially sound, having minimal levels of debt and a generous amount of cash. This means that the company looks to be highly sustainable and is not taking excessive risk in its capital structure. Indeed, the returns from the intellectual property developed by ARM are so high that leveraging up the balance sheet does not seem to be necessary at the moment.

Furthermore, ARM has extremely strong cash flow, with the company generating free cash flow of £136 million last year. Although the free cash flow yield is not hugely impressive at 1%, the current share price reflects the high level of growth in earnings (and free cash flow) that are forecast by the market. Therefore, looking past this year, shares seem to offer good value for a high-quality tech company.

So, I'm impressed by the quality and desirability of the products in which ARM is involved, as well as the strong cash flow and net cash position that the company enjoys.

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