Despite High P/Es, Acme Packet & ARM Holdings Still Cheap

Investors who judge stocks like Acme Packet and ARM Holdings by their price-to-earnings multiples are making a grave mistake, Cramer said during Wednesday’s “Mad Money.” They should really be looking at these companies’ addressable markets.

“And by that standard,” Cramer said, “yes, I would still be a buyer of both.”

Most people see Acme and ARM’s P/Es—54 and 62 times forward earnings, respectively—and gasp. Then they consider Acme’s 685-percent gain since August 2009 and ARM’s 280-percent return since October the same year, when Cramer first recommended both, and they immediately think of the dot-com bubble. But what these investors are missing here is perspective.

Acme Packet makes it possible to speed up the transition of legacy terrestrial telecommunication networks built for voice services only to wireless networks that deal in voice, video, data and messaging. At the same time, ARM Holdings builds the chips necessary to keep smartphones and tablets affordable. These are technologies on par with Edison’s light bulb, Cramer said, as well as Intel’s microchips and even Facebook’s ability to bring an entire planet together in one place.

The problem with these game-changing inventions, Cramer said, was that nobody understands their significance at first. And how could they? The revolution hasn’t happened yet. But when investors reject these stocks, they’re being agnostic, if not atheist, about the scientific revolution. They fight it because they just don’t understand yet how big these technologies really are.

“But I need you to stop fighting,” Cramer said, “and become a believer.”

Why? Because of the addressable markets of Acme Packet and ARM Holdings. Acme’s is $20 billion, and that’s without taking into account any new network build-outs. So it’s hard to think how, even after Wednesday’s $11-plus run, the company’s $4.28 billion market cap can contain that potential.

The same goes for ARM. Just yesterday the company’s president told “Mad Money” there will be 100 billion ARM-based processors in 2020, up from 6 billion this year. That addressable market is way bigger than the $12.7 billion market cap.

Continued and still bigger moves are almost inevitable for these stocks, it seems. Investors just have to wrap their heads around the idea.

“We hesitate to look at stocks this way because the last time we did it, we got the 2000 to 2003 dot-bomb collapse [when] people came to their sense,” Cramer said. “But, you know, we often forget that the Nasdaq went from 1,000 to 5,000 in the interim before people necessarily came to their senses. We want some of that humungous gain.”

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