Smartly Growing Over Smartphones

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

The fast spreading popularity of Smartphones and Tablets has completely changed the outline for the Mobile Industry. The emphasis has now shifted towards reducing power consumption in the devices and to improving battery life in mobile phones. In this respect, ARM leads the industry with its innovations in improving energy efficiency in mobile handsets. The recent news of Apple considering the shift to ARM processors from Intel for its MAC platform came as a boost for ARM’s investors. Apple is already using ARM processors in all the models of its iPhones and iPads and there would be an additional synergy for Apple if all its products were on the same processor. This would further intensify ARM’s ongoing battle with Intel.

Let us discuss these companies in detail. 

Company

Last 6m stock movement (~)

ARM Holdings plc (NASDAQ: ARMH)

64%

Intel Corporation (NASDAQ: INTC)

-22%

Advanced Micro Devices, Inc. (NYSE: AMD)

-61%

Source: Yahoo Finance

Intel has always been known as the leading chip maker in the PC and server market. However, with a large number of the consumers shifting to Tablets and Smartphones, the scenario has totally changed for the company. The majority of Smartphones and Tablets are using ARM chips where as Intel has only a few processors for Smartphones in its portfolio. However, the company is now making efforts to replicate its dominant position in the PC segment in the Smartphones and Tablets market too. Recently, Motorola introduced 'Motorola Razr i', its new full touch screen smartphone with the Intel Atom processor. With the latest technology from Intel, this is the first smartphone to achieve a speed of 2.0 Ghz along with an improved battery life and good applications execution. Intel is highly dependent on this move to increase its presence in the Smartphones market.

Another company competing against Intel and ARM Holdings is Advanced Micro Devices, which is the second biggest maker of PC Processors. But, its stock performance has been extremely disappointing as compared to its peers with the company’s stock facing a downfall of ~61% in the last six months. However, to compete against Intel and ARM Holdings in the Tablet market, Advanced Micro Devices recently launched its dual core Z-60 chip, which can be used in hybrid PC-tablet devices. In its 3Q12 results, the company's revenue saw a sharp decline of ~33% to ~$1.27 billion y/y. To pullback its results on a profitable track, it has announced a restructuring plan to reduce its operating expenses and generate an additional ~$20 million in 4Q12 and ~$190 million in 2013.

Coming back to ARM holdings, it is quite clear that the Smartphones market growth is the biggest opportunity for the company. Let's see some of its growth factors in detail.

Smartphones Market to Drive Growth

Smartphones cover ~40% of the handset market as of Nov. 2012 and their share is expected to grow at ~20% annually in the next six years. Apple's iPad tablet PC is based on ARM powered processor which gives it a dominant position as Apple leads the Tablet PC market. The ARM processors are also compatible with Microsoft's Windows 8 operating system which will further enhance its market for Tablet PCs. Along with this, the company will also benefit from the high royalty rates and selling prices of advanced processors used in most of the latest smartphones. The iPad 4 has a $0.70-$1.05 content of royalty per unit, up from iPad 3 ($0.66-$1.01) and iPad 2 ($0.33-$0.46). Royalties contributed ~53% (~$121 million) to the company’s total revenue in 3Q12. And, with rising royalty rates the company's revenue is all set to reach new heights.

Other Potential Opportunities -

  • Apart from the smartphones, the non-mobile markets such as digital TVs and the computing devices market also holds an important place in ARM’s plans. The computing market is a huge opportunity in front of the company with ~$128 million royalty generation expected in apps processors by 2014. The company is also set to launch its ARM v8 64-bit processors in 2014 which will broaden its base wider in the market.
  • Most recently ARM created a consortium (Bridge Crossing LLC) of 10 leading technology companies to buy the patent portfolio of ARM's competitor MIPS. The company will pay ~$168 million to the consortium for patents which will help it to avoid the future legal settlement fees with MIPS. This will also add new customers for the company as most of the MIPS's customers are already shifting to ARM, such as Broadcom.

Summing up, ARM's leading position in the market along with its strong outlook for the future gives it a competitive edge in the industry. Its stock price has seen tremendous growth with ~64% of return in the last six months. And, with the above mentioned opportunities in place I expect this trend to continue in the future. I recommend buying this stock.  


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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