British chip designer ARM Holdings plc (NASDAQ:ARMH) is a company that has inspired immense confidence within the tech industry for quite some time now, and the optimism has trickled down to the Street as well, as the company has delivered stellar results over the past few quarters. The main reason behind that has been the fact that ARM Holdings plc (NASDAQ:ARMH)-designed chips that are, in turn, manufactured by companies such as QUALCOMM, Inc. (NASDAQ:QCOM), NVIDIA Corporation (NASDAQ:NVDA), and Samsung, can be found in around 90% of the world’s smartphones and a considerable percentage of tablets as well.
However, a recent announcement by Samsung Electronics with regard to its Galaxy tablet range seems to have dented that confidence to some extent, with ARM shares taking a plunge. This is because Samsung has said that it would be using the Clover Trail+ processor manufactured by ARM Holdings plc (NASDAQ:ARMH)’s bigger rival, Intel Corporation (NASDAQ:INTC), in a particular version of its yet-to-be-released Galaxy Tab 3. In fact, some analysts have already started to express the viewpoint that ARM’s glory days are nearing their end.
But then, when I hear about this news, the first thing that comes to my mind is whether Intel is really aiming at going one up over ARM Holdings plc (NASDAQ:ARMH) at present, or whether it’s more of a question of ensuring the company’s own survival in a post-PC world. If you ask me, it’s more of the latter, and attaining supremacy over rivals such as ARM and its licensee QUALCOMM, Inc. (NASDAQ:QCOM) may not exactly be a priority for Intel Corporation (NASDAQ:INTC) right now. At least, that’s the way it should be for Intel, especially after its core PC business is fast moving into oblivion.
From that aspect, the Samsung design win definitely spells celebration time at Intel Corporation (NASDAQ:INTC). After all, Samsung is the second largest maker of tablets after Apple and controls around 18% of the worldwide tablet market, according to research firm IDC.
So, let’s delve a bit deeper and find out first why Samsung may have chosen an Intel chip, giving it preference over its traditional chip design partner ARM Holdings plc (NASDAQ:ARMH). And then, it might be prudent to conduct a short review of ARM’s present situation to assess whether this stock deserves to be a part of your tech portfolio.
Why Intel and not ARM
With regard to the first issue, there may have been several reasons why Samsung chose Intel Corporation (NASDAQ:INTC) over ARM, with pricing being a strong probability. Intel, as we know, is desperate to cut through into the market for mobile device processors and therefore, may well have offered a better deal to Samsung, who in turn, wanted a break from ARM Holdings plc (NASDAQ:ARMH)’s monopoly in this matter. After all, everyone would want to keep their suppliers on their toes.
The second reason might have been related to the recent supply breakdowns faced by Samsung, leading to unfortunate sales-related losses. That might have worked in Intel Corporation (NASDAQ:INTC)’s favor as the latter owns its chip manufacturing factories or ‘foundries,’ unlike ARM licensees such as QUALCOMM, Inc. (NASDAQ:QCOM) or NVIDIA Corporation (NASDAQ:NVDA) that outsource their chip manufacturing process to third-party suppliers.
But, if you look at all these factors combined, it’s more of a headache for ARM’s army comprising Qualcomm and NVIDIA Corporation (NASDAQ:NVDA), a problem that can and should be taken care of by clever logistics on their part. At the same time, this would ultimately boomerang on ARM Holdings plc (NASDAQ:ARMH)’s overall prospects, which is why it’s necessary to have a round-up of the advantages lined up in favor of ARM at present.
Why the Cortex-A12 really matters
Well, for a start, there’s ARM’s newly developed Cortex-A12 processor design, targeted at the mid-range mobile handset market. This, to me, seems to be a very intelligent strategy indeed and I perfectly agree with ARM Holdings plc (NASDAQ:ARMH)’s recent prediction that the mid-range segment will witness a massive boom in the next couple of years. After all, there are no dearth of instances such as the Galaxy Grand Duos and the S4 Mini from handset manufacturers such as Samsung, products that come out after the actual biggies (like the Galaxy Grand and the S4), with the intention of making them more affordable for handset buyers.
And that’s not all. Cortex-A12 keeps up with the ARM legacy of ‘low power and high performance,’ as it promises to be 50% more energy efficient than prior versions, apart from cutting down on battery drainage, the latter being a perennial headache for handset manufacturers.
The LTE chipset scenario
Intel Corporation (NASDAQ:INTC) is yet to make a mark in the realm of LTE-enabled chipsets, an area where ARM Holdings plc (NASDAQ:ARMH) seems to be generations ahead. That also virtually guarantees ARM’s dominance over the crucial U.S. market, where the current trend happens to be a transition into the next generation LTE network technology. In fact, ARM-designed LTE-enabled chips manufactured by its licensing partner QUALCOMM, Inc. (NASDAQ:QCOM) dominate the market for such products and are considered to be the industry benchmark, as I have already stated before.
In fact, with Qualcomm having an impressive record of grabbing a whopping 86% share of the LTE-enabled processor market and having already launched its third generation of LTE-enabled chipsets, Intel sure has a long, long way to go if it wants to make a decent mark. Till now, all that Intel can talk about is an embarrassing less than 1% share of the global mobile processor market.
Wider horizons
That apart, ARM Holdings plc (NASDAQ:ARMH) investors should also consider the sheer range of applications that the company’s chipsets have all over the world. In fact, ARM has a formidable presence in the realm of embedded processing, and its chips have diverse applications ranging from automobile technology to toys to consumer electronics. Not to mention the fact that the company has already dropped broad hints of getting into the wearable devices market, what with Google Glass and the rumored Apple iWatch being the current hot topics of discussion. Intel Corporation (NASDAQ:INTC)’s base is still, unfortunately rooted in personal computers and notebooks.
ARM’s core business model
However, even if you discount all of the above, ARM Holdings plc (NASDAQ:ARMH)’s core business model makes it the real winner at the end. This is because the company does not manufacture its own chips at all, rather its licenses its chip designs to a wide range of companies that include QUALCOMM, Inc. (NASDAQ:QCOM), Samsung, and NVIDIA Corporation (NASDAQ:NVDA). These companies then customize these chips as per their needs, and these customizations, in future, are sure to take care of any design modifications that are made by their bigger rival Intel. The market dynamics obviously point in that direction, and the underlying winner will be ARM.
Not having to manufacture chips also means that ARM does not have to own foundries, resulting in low capital expenditure, giving it a distinct advantage over foundry-owner Intel. And by the way, ARM Holdings plc (NASDAQ:ARMH) also gets a royalty fee for each and every chip unit shipment, creating a truly win-win situation for itself that should continue to pay rich dividends for a long time to come.
Some parting thoughts
Having said that, ARM does have to be careful with a few aspects with regard to its bigger competitor. Intel Corporation (NASDAQ:INTC)’s first tablet win may be a signal that the company is planning to make further inroads, particularly in the highly lucrative field of mobile processors where sheer volumes hold a lot of potential for the company. And if its newest collaboration with Samsung proves to be a success, there’s no reason why future Samsung handsets will not feature Intel processors.
That would be a big step into ARM territory indeed, which is again why ARM needs to watch out for product developments surrounding Intel’s new Silvermont processors that are meant for the mobile market. In fact, ARM will have to hasten the commercial availability of its latest processor designs, as timing is everything if it wants to compete with a cash-rich peer such as Intel.
At the same time, ARM Holdings plc (NASDAQ:ARMH)’s aspirations for grabbing a larger share of the server market may be thwarted by Intel Corporation (NASDAQ:INTC)’s Haswell chip design, that exclusively focuses on delivering higher performance while consuming much less power than before. That’s something which ARM was reputed for, until now.
Honestly speaking, there’s no end to this game in a fast-changing technological world, and the real winners at the end should ultimately prove to be ARM’s inherent business model, coupled with its sheer diversity of product applications and solid lead in the LTE-enabled chipset space. ARM Holdings plc (NASDAQ:ARMH), as always, is a stock that should continue to pay off handsomely in the long-term and truly deserves to remain a part of your tech portfolio.
Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Intel Corporation (NASDAQ:INTC). The Motley Fool owns shares of Intel and QUALCOMM, Inc. (NASDAQ:QCOM).
The article Should You Doubt This Company’s Prospects? originally appeared on Fool.com.
Subhadeep is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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