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Could Arm Holdings Stock Help You Retire a Millionaire?

It’s not easy to find millionaire-maker stocks. That’s because a lot must go right for a stock to generate that much growth. The business must perform for years, navigate competition, innovate, and find a way to grow its profits year after year.

Instead of looking for the rare home runs, investors should consider batting for doubles and triples. Focusing on getting consistent hits isn’t as flashy as swinging for the fences, but it’s a strategy that can do very well for you over time. Steadily appreciating stocks like Arm Holdings (ARM -0.41%) won’t make you rich overnight, but they can set you up for a golden retirement.

This chipmaker will probably not appreciate 100-fold from here, but it can be a long-term game-changer for your stock portfolio.

Arm Holdings is a money-printing machine

Few companies make money as easily as Arm Holdings does. Look at the houses in your neighborhood. The vast majority of homes follow standardized architectural designs. Sure, some will have minor differences, like the amount of square footage or the number of bathrooms, but the basics are similar. A foundation supports walls and a roof, as dictated by a basic design and a set of rules (i.e., building codes). Most homes follow that basic design because it’s efficient and works well.

Arm Holdings’ role in the tech world involves creating similarly standardized architectures for computer chips. The company invents designs and instruction sets for CPUs (central processing units) — the brains of most electronic devices. It then collects royalties and licensing fees on the sales of any chips that use its intellectual property. Today, roughly half the world’s chips with processors use Arm Holdings’ designs.

The company’s growth formula is straightforward. The world is becoming increasingly driven by technology. Some examples of the many end markets for CPUs are internet-connected devices, cloud computing, artificial intelligence, factory automation, data centers, and modern vehicles. Roughly 28.6 billion chips using Arm designs were shipped over the past year, and nearly 300 billion have shipped since Arm Holdings started in 1990.

Growth tailwinds are poised to continue

If you think about that last sentence, you’ll see how much CPU demand has grown. Arm Holdings has been in business for 34 years, yet nearly 10% of all the chips ever manufactured using its designs shipped within the past year. Some digital growth trends will come and go over time. However, the broader trend is that the world will need more CPUs in the future, not fewer.

According to estimates by Verified Market Reports, the global CPU market was worth $50 billion last year, and it forecasts that figure will grow by more than 10% annually and double in size to $100 billion by 2030. The boom in artificial intelligence spending could arguably make this estimate conservative.

Investors can expect Arm to enjoy steady revenue streams. As technology matures and demands more sophisticated chips, Arm’s current CPUs will be replaced with more advanced versions.

You can see this playing out now. Arm’s newer ARMv9 chips are steadily replacing outdated ARMv8 chips. The constant transition from old to new creates stable revenue streams for the business and investors.

Arm Holdings has a drawback

If you’re looking for a significant weakness in this business, you might have difficulty finding it. As a company, Arm Holdings is wildly profitable, commanding a staggering 95% gross margin. Its largest expense is research and development — a necessary outlay if it’s to keep its designs on the cutting edge.

However, the stock itself has two significant drawbacks: size and valuation. Unfortunately, while Arm Holdings is a relative newcomer to the public markets, it already sports a $140 billion market cap. That’s massive for a business doing just $3.2 billion in annual revenue. Additionally, shares are changing hands at a lofty 87 times earnings.

Analysts believe Arm will grow earnings at an annualized rate of 25% for the next three to five years, which is nice but doesn’t justify such a high price-to-earnings ratio. Investors who are willing to build their stakes in Arm slowly or give the stock years to grow into its valuation could eventually see it contribute to a successful portfolio. But those who are looking to Arm Holdings to answer their prayers for a millionaire-maker stock may want to keep looking.

This post appeared first on fool.com

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