5 Fabulous Fabless Chip Makers
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In the recent past, if you announced to a venture capitalist that you wanted to create a company that made microchips, you would have been laughed out of the room. Compete with Intel? With their economies of scale? That would be commercial suicide!
Intel's extensive (and expensive) chip fabrication plants erected a huge barrier to entry to competitors. If you could get rid of the overhead of actually making the chips, then you might actually have a chance. With the rise of "fabless" semiconductor manufacturing, that's exactly what's happening. What fabless means is that instead of making the chips themselves, manufacturers farm out the manufacturing to outside fabrication facilities, many of them in Asia.
One of the biggest company in this space is Qualcomm (NASDAQ: QCOM). The company posted a profit of $4.5 billion last year, or $2.57 per share, an increase of 40 percent over the previous year. The company makes a number chips, but most notably licenses ARM Holdings' (NASDAQ: ARMH) architecture, for processors for a number of manufacturers, including Kyocera, HTC, Sharp, LG and others, as well as Apple. The company also makes mobile communication equipment, including the Gobi 4G modems.
Another major fabless company is Broadcom (NASDAQ: BRCM). This company's products are so ubiquitous that Broadcom is the Intel of networking. You're probably seeing this article thanks to a Broadcom Ethernet adapter, whether wired or wireless. The company posted a profit of $961 million last year, down 14 percent from the previous year. Sales were $7.3 billion last year, up by 8 percent. The company's COGS has been in proportion with its sales, so Broadcom appears to be in good shape.
Intel's major rival for the x86 market, AMD (NYSE: AMD), has been climbing out of the hole that the Great Recession plunged many companies into. In 2008, the company posted a loss of $3 billion. In 2011, AMD posted a profit of $491 million, which is a pretty good turnaround. The company had $6.5 million in sales, but only grew by about 1 percent over the previous year, compare with 20 percent the year over that. Even worse, the company had a round of layoffs in 2011.
There's still a ray of sunshine peeking out of these dark clouds. The company still has an important niche in its graphics cards, coming from its purchase of ATI. The company's fabless operation and the fact that's it's profitable means it has a potential advantage against Intel.
And speaking of graphics cards, AMD's rival, NVIDIA (NASDAQ: NVDA), is a major player in this space, concentrating on high-performance graphics boards for the gaming market. The company posted a devlish profit of $666 million last year, a staggering jump of 142 percent. NVIDIA's growth has been credited toward getting an early entry into mobile computing, especially with its Tegra chips. Anyone with half, or even a quarter of a brain can see that mobile is the future for the semiconductor industry.
This brings us to our final company, Arm Holdings, mentioned earlier. This company has profited handsomely with its architecture, which powers Apple's mobile devices and the various Android smartphones and tablets out there. This company has so many fingers in mobile pies that a recent post of mine asked whether Intel, the longtime chip champion, was obsolete. With a profit of $175.06 million last year, the company is holding its own.
The company's income statement shows the advantage of fabless operations for keeping costs under control. The company had $764 million in sales last year. Their cost of goods sold was only $22.58 million.
By keeping overhead down, fabless semiconductor manufacturers can do end runs around traditional companies like Intel. If you've looked over Apple's 10-Ks or 10-Qs recently, you can see how much of a moat this allows the companies to dig and still have money left over to fill with alligators afterward.
Fool blogger David Delony has no positions in the stocks mentioned above. The Motley Fool owns shares of Qualcomm. Motley Fool newsletter services recommend NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
