ARM Holdings plc (LON:ARM) celebrates 15 years as a listed company next month. Early shareholders have seen their shares rise twentyfold.
ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) went public on 17 April 1998, meaning next month marks its fifteenth anniversary as a listed company.
It was one of the hot stocks of the dotcom bubble here in the UK, but one of the few that is still thriving today. It started life as part of Acorn Computer Group, perhaps most famous for the BBC Micro, and was spun out as a separate company in 1990.
Unlike many tech stocks, it was profitable from a very early stage. Its 1998 annual report shows that it made a profit as least as far back as 1994, well before it joined the market. Profitability was very unusual for tech stocks back in the 1990s, and was due to the smart way its business model operates.
ARM designs chip processors and then licences this technology to its various partners. An initial licence fee typically covers ARM's development costs, and then a royalty fee for each chip manufactured by its partners should represent almost pure profit thereafter.
The roller coaster
ARM's flotation price was 575p back in April 1998. Share splits since then make this price equivalent to around 43p today. The shares did very little for several months, and you could still pick them up for much the same price in November 1998.
Investors then started to take notice, as they scrambled around for anything remotely connected to the internet. The shares ended 1998 at 64p. By the middle of 1999, they were 146p, before soaring to 828p by the end of year.
They peaked at 1,010p in February 2000, before starting a long decline. On 2 October 2002, the company issued a profits warning and its shares slumped 63% in one day from 126p to 47p, pretty much back to their flotation price.
That marked a low, and shares steadily climbed to around 160p before the financial crisis struck. You could have picked up the shares for as little as 80p during January 2009. They now change hands for around 950p.
ARM in 1998 and 2012
It's interesting to compare some stats for the business when it listed and today.
|Profit before tax||£9m||£221m|
Profit growth has outstripped both growth in sales and staff numbers. However, the need to continually develop its products has meant its profit margins haven't expanded quite as much as you might expect.
Indeed, looking at ARM's 1998 annual report and the 2012 version, you can see how the fundamental way it operates its business has stayed much the same over the years. The metrics used to judge its business look very familiar; however, the pictures of the products its chips powered back then do look somewhat dated!
I would like to say that I'm an ARM shareholder, and that I've held them throughout the good times and bad. But I haven't. Nevertheless, there are many lessons to be learned from such a story.
Focusing on the business model and how a company makes its money is key. ARM throws off cash, so hasn't needed to continually tap its shareholders for additional funds. Its share count has more or less doubled since it floated, though, presumably mostly due to acquisitions and share options.
And the best businesses often always seem expensive. When ARM joined the market, it was valued at around 80 times its latest annual profits. And it still is today.
Perhaps the most important lesson is that great business often give you many opportunities to buy them. In particular, you could have picked up ARM in 1998, 2003 and 2008 and earned supersized returns. Indeed, 2008, 10 years after it joined the market, was perhaps the best opportunity of all.
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> Stuart (sound of gentle sobbing) does not own any shares in ARM Holdings.