It's not uncommon for valuation and enthusiasm to create gulfs between a company's performance as a business and the performance of the stock, and that seems to be the case for ARM Holdings (Nasdaq:ARMH). While ARM's IP continues to spread across the market, the stock has had huge expectations to fulfill and has made relatively little progress since early 2011. Unfortunately, current valuations already presuppose impressive ongoing penetration and would seem to leave little on the table for investors.

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First Quarter Results a Question of Perspective
It interests me that even though reported financial numbers would seem to be relatively objective, there's a huge amount of subjectivity in the process. To wit, some analysts walked away from this quarter calling the results "robust," while others claimed that the growth deceleration is proof that the bloom is off the rose.

Revenue rose 14% from last year, while falling 4% sequentially (and thus following the pattern of most hardware-related stories in tech). Licensing revenue rose 27% from last year, but royalties rose just 6%. This slower growth can be directly tied back to lower hard drive production and sales volumes; while ARM is best known for its presence in smartphones, a significant portion of its revenue comes from products like drive controllers.

Margins held up pretty well, though this company's operating structure leaves relatively few opportunities for leverage. Gross margin ticked up a bit, while reported operating income jumped 67% and operating margin expanded more than 10 points. On an adjusted basis, one that includes share compensation, operating margins were more or less consistent on a sequential and annual basis.

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The Battle to Keep What It Has, While Getting Even More
ARM is in an interesting position right now. ARM-based chips made by the likes of Samsung, Broadcom (Nasdaq:BRCM) and Qualcomm (Nasdaq:QCOM) hold over 90% share in smartphones, 80% share in digital cameras and about 40% share in set-top boxes. By comparison, the technology has virtually no share in PCs or servers, minimal share in notebooks and likewise little share in areas like automotive and industrial semiconductors.

Now Intel (Nasdaq:INTC) is making a concerted effort to reassert itself in the market and gain share in smartphones and tablets, while also hoping to spur a revival in notebooks with better chips and better performance. Maybe Intel will not be able to gain a majority of smartphone slots, but it seems dangerous to bet that they won't grab meaningful share away from ARM licensees. The risk, then, is that ARM has almost as much to lose from Intel as it stands to gain from new markets.

It's also worth noting that ARM licensees are increasingly bumping heads in the market. Companies like Marvel Technology (Nasdaq:MRVL), Texas Instruments (Nasdaq:TXN), Broadcom and Qualcomm are all in a scrum for market share, and concentrating more functions on fewer chips.

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The Bottom Line
There are a lot of impressive things about the ARM model and the performance of its technology. Unfortunately, current valuations presuppose a great deal of further share gains across the chip market. While ARM is likely to continue to be quite successful as a company, I worry that any inroads made by Intel are going to come at the cost of ARM's multiple. Accordingly, I'd be very careful about buying these shares today.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.