Cash In on Chip Wars, Part One

A. Colin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There is a multi-billion dollar battle going on right now between the traditional, established American chip manufacturers and a suddenly big British upstart. Yes, the battle is directly related to the company changing everybody’s game, Apple (NASDAQ: AAPL).

In a December article, “The Next Great Chip Clash,”  Fortune magazine described how Apple’s hot new products, and the chips they use, are dramatically changing the battleground for leading chip designers and manufacturers:

  • Chips once found exclusively in cellphones are making their way into the building blocks of traditional data centers, like servers.
  • The traditional server market reached $52.8 billion worldwide last year, according to research firm Gartner.
  • U.K.-based ARM Holdings (NASDAQ: ARMH), which licenses its popular processor architecture to mobile-chip manufacturers like Qualcomm (QCOM), has ramped up efforts to get its designs into data centers dominated by Intel (INTC).
  • ARM's microprocessors are currently found in more than 90% of all smartphones.
  • Major companies like Advanced Micro Devices (AMD) and Hewlett-Packard (HPQ) are turning to such designs as well.
  • Traditional chip makers Intel, Motorola and TI (along with stalwart software supplier Microsoft) are scrambling to be part of these important new markets.
  • “Even Facebook (FB),” The article says, “known for assiduously custom-designing its data centers from the ground up -- has tested the use of alternative chips in servers.”

<img src="/media/images/user_15176/smartphone-chips_large.jpg" />

Diminutive smartphone chips will help power-hungry data centers cut down on costs.

The 64,000-dollar question is which one is the Foolish choice for investing:

The $17 billion upstart ARM is UP three-fold in just the last two years! At only half this pace, the stock will hit $55.84 in a year. Its Price/Earnings (P/E) ratio is a staggering 169 as revenues and earnings grow 21 and 34%, yearly. ARM trades at a rich 10 times book value. Yet its A6X processor is in the latest iPhones and iPads, both of which lead the markets for smart phones and their big brother tablet PCs.

By comparison, widely-held, $19 competitor Broadcom (NASDAQ: BRCM) increased only 12% last year. It made about three times more profit ($927 million) than ARM on half the margin (12%). Broadcom trades at only a 24 P/E, while the Price/Book (P/B) ratio is barely three times, but then revenue growth last year was only 8%.

The $16.5 billion dollar Japanese giant, Kyocera Corp (NYSE: KYO) trades for less than its book value, possibly because of negative earnings growth last year. KYO squeaks by on a net profit margin of just 6.7%

Part Two

So while ARM may be a good action stock for Fools to trade, not hold for investment, neither Broadcom or Kyocera look positive. Part two looks at Qualcom, Intel, Applied Materials, Analog Devices, Texas Instruments, HTC, AMD and Motorola. It finds at least one high-yield, modest-price growth stock in a BULLISH pattern.   

The author has no financial interest in any of the stocks mentioned.

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