Does ARM Holdings Support Rising Prices?

With shares of ARM Holdings (NASDAQ:ARMH) trading around $49, is ARMH an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

ARM Holdings engages in the design of microprocessors, physical intellectual property, and related technology and software. It also sells development tools that enhance the performance of embedded applications. The company operates in three segments: the Processor Division, the Physical IP Division, and the System Design Division. Its products include microprocessors cores that consist of specific functions such as graphics IP, fabric IP, embedded software IP, and configurable digital signal processing IP.

ARM Holdings reported earnings and revenues figures that have not impressed investors. However, ARM enters the final quarter of 2013 with a record order backlog and a robust opportunity pipeline. This combination points to another strong quarter for licensing revenue in Q4. Simon Segars, Chief Executive Officer said, “as the products we use every day become more connected, and as new categories of smart devices are introduced, there are increasing opportunities for ARM’s high-performance, low-power technology, which drive both license and long-term royalty revenues.”

T = Technicals on the Stock Chart Are Strong

ARM Holdings stock has been exploding higher in the last several months. The stock is currently trading near highs for the year and looks ready to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, ARM Holdings is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

ARMH

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of ARM Holdings options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

ARM Holdings Options

37.05%

20%

19%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

November Options

Flat

Average

December Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on ARM Holdings’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for ARM Holdings look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

16.78%

293.23%

22.49%

31.82%

Revenue Growth (Y-O-Y)

25.80%

24.23%

24.57%

25.37%

Earnings Reaction

-4.73%*

-5.18%

15.11%

4.15%

ARM Holdings has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about ARM Holdings’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has ARM Holdings stock done relative to its peers, Intel (NASDAQ:INTC), NVIDIA (NASDAQ:NVDA), Texas Instruments (NASDAQ:TXN), and sector?

ARM Holdings

Intel

NVIDIA

Texas Instruments

Sector

Year-to-Date Return

30.19%

16.80%

28.34%

30.62%

26.54%

ARM Holdings has been a relative performance leader, year-to-date.

Conclusion

ARM Holdings engages in the design and manufacture of technology products and services including microprocessors. A recent earnings report has investors expecting more from the company. The stock has been exploding to the upside in recent months and is now trading near highs for the year. Over the last four quarters, earnings and revenues have been on the rise, however, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, ARM Holdings has been a year-to-date performance leader. Look for ARM Holdings to OUTPERFORM.

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