Intel Ready for a Huge Boost From the Processor War
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As personal computers, laptops and tablets manufacturers prepare for Microsoft's (NASDAQ: MSFT) Windows 8 operating system, processor designers and makers are intensifying their competition to increase market share in powering these devices. Intel (NASDAQ: INTC), which has long dominated the personal computer and laptop market with its processor, is going against ARM Holdings (NASDAQ: ARMH) which dominates the mobile device market. In this article, I will show how these two companies are set to gain from the processor war, and why investors should buy both stocks now.
ARM, a UK based company, doesn't build processor chips by itself but designs processor technology that it licenses to companies such as Qualcomm (QCOM), Texas Instrument (TXN), Nvidia (NVDA) and just recently Advanced Micro Devices (AMD). ARM's processor design, which is said to be energy-efficient, is used by nearly all smartphones and tablets which includes Apple's (NASDAQ: AAPL) and Samsung's products.
Intel in turn dominates the personal computer and laptop markets, with the help of Microsoft's Windows using its x86 architecture, but have failed to thrive in the mobile device market where battery life is crucial. Intel has recently launched its energy-efficient processor called Atom which debuted with France Telecom's Orange smartphone. Intel also created the new breed of thin, lightweight laptops called Ultrabooks which runs on Intel processors as way to secure its market. Intel expects that the new Windows 8 with touch-screen capability will stimulate demand for Ultrabooks and other personal computers in the coming months.
The competition is likely to intensify as Microsoft's latest operating system (OS) became compatible with ARM designed processors. At the same time, the new OS called Windows 8 has an interface optimized for touch-screen use which provides Intel an opportunity to gain more presence in the tablet market. ARM and Intel have been trying to expand in each other's markets, with ARM advancing into computer servers while Intel increases its focus on mobile devices.
AMD teams up with ARM
ARM has recently teamed-up with AMD as they focus in battling Intel. AMD is said to incorporate ARM's security designs called TrustZone starting in 2013. TrustZone is a security environment developed by ARM that supports a variety of security software programs which have been around since 2004 and is in place in many mobile devices such as smartphones. I believe this move is a counter to Intel's heavy investment in security technology, which includes buying McAfee for $7.7 billion last year.
Since the 1980s, AMD has been overshadowed by Intel, which typically sells at least 80 percent of the microprocessors used annually in personal computers. But Intel until recently has been shut out of smartphones, which mostly use ARM-based chips. Moreover, ARM-based chips utilized in computer servers will hit the market by year end, posing a significant threat to Intel's business. It is said that Dell (DELL) and Hewlett-Packard (HPQ) are testing server chips designed by ARM.
The Apple-Intel relationship
Rumors have it that Apple has had an uncomfortable relationship with Intel for some years now. Apple opted to use ARM's energy-efficient processor technology on its mobile devices such as iPhone and iPad. Now Intel is moving into the tablet market with the launch of Windows 8 and into the smart phone market with its Atom processor which leaves Intel directly competing with Apple, something that complicates the relationship to much more.
Apple has begun to phase out its use of Google (NASDAQ: GOOG) services by using Siri to replace Google search and just recently replacing Google maps in its newest operating system iOS 6 with its own application. If Apple continues this strategy, Intel may be the next company to be removed from its product lines. Intel is without doubt tied up with Microsoft's Windows platform, which directly competes with Apple's mac system.
The Microsoft-Intel relationship
Microsoft, though still strong on conventional computers such as laptops and desktops, has watched the interest of consumers shift to mobile devices such as Apple's iPhone and iPad. Microsoft has overhauled Windows to incorporate both its traditional computer market and the world of tablets. The result, Windows 8, is a potentially unsettling change for users long comfortable with the familiar Windows interface.
Intel focused on processing data rather than more mobile-centric issues such as power consumption. Intel, for the meantime, created the Ultrabook which is seen by some as a copy of Macbook Air's design. It has come up with better chips, faster processors and designs featuring sliding, folding or detachable keyboards which Intel hopes will blur the lines between laptop and tablet. Intel is also trying to advocate usage of touch screens and other features in the Ultrabooks to increase its appeal to consumers and differentiate itself from the Macbook Air.
Intel has more than 3 billion shares outstanding, a market capitalization of about $137.5 billion and an enterprise value of about $131.3 billion. ARM on the other hand has only 450 million shares outstanding, an enterprise value of $9.9 billion and a market capitalization of around $10.5 billion. At a recent price of about $23 per share, ARM has a higher price to earnings multiple of about 52.7 times compared to Intel's price to earnings multiple of about 10.6 times at a recent price of about $27 per share.
In the first 3 months of 2012, ARM's revenue grew by 14.2% year-on-year completing a trailing 12-month (TTM) gross profit of $721 million. The inclusion of ARM, a partner with Microsoft, will eventually increase revenue for ARM as usage of their chipset designs will strengthen its position in the mobile market.
With consumers unrelenting thirst for faster and better devices, may it be mobile or conventional, both ARM and Intel are certainly expected to perform well in the next few months. I recommend buying both ARM and Intel. ARM has a very high forward price to earnings multiple which suggest that investors are confident in its future earnings. This goes hand-in-hand with the notion that mobile device manufacturers will be continuing its usage of ARM products.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Intel, and Microsoft. 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.