Ardevora Asset Management has profited from its long-term position in ARM Holdings, after the UK chip maker was acquired by Japan's SoftBank for £24.3bn earlier this month. Jeremy Lang, founder and partner of Ardevora, says the team has liked ARM for a long time and can understand its appeal to SoftBank.
"ARM may look like a 'risky' tech stock, but in reality it is more like a utility," Lang says. "ARM is an intriguing stock because it operates in an industry characterised by unpredictability and risk: semiconductors. Individual semiconductor chip makers face difficult to predict demand, high fixed costs, intense competition and periodic technological upheaval. New products can explode in popularity, but just as quickly face new competition and commoditisation.
"Yet ARM glides through the industry with amazing predictability. This is because ARM provides a vital product for huge portions of the industry. Also, regardless of the price of any individual semiconductor chip, ARM receives a fixed royalty for every chip sold using one of its designs. Its customers may have wildly unpredictable pricing, but ARM does not. This gives ARM consistent, easy to predict, free cash flow year after year."