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How Long Will Apple Inc. (AAPL)’s Edge Last?

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Apple Inc. (NASDAQ:AAPL)‘s stock may have declined after the company announced its iPhone 5s and its not-so-cheap iPhone 5c. But, on the same news, shares of ARM Holdings plc (ADR) (NASDAQ:ARMH) immediately jumped 8%, with a total gain of 14% over the last five days, as investors anticipated hopeful news from Apple. What’s the story?

Follow the leader
Earlier this month, Evercore Partners’ Patrick Wang insisted that ARM Holdings plc (ADR) (NASDAQ:ARMH) was undervalued. His argument was based on the rumor mill’s claim that Apple Inc. (NASDAQ:AAPL) would be adopting the 64-bit microprocessor in its new iPhone. Though the processor is ultimately Apple’s, it licenses technology from ARM.

Apple Inc. (NASDAQ:AAPL)As it turns out, Apple Inc. (NASDAQ:AAPL) did launch a 64-bit microprocessor: the A7. Beyond the direct benefit ARM Holdings plc (ADR) (NASDAQ:ARMH) receives from Apple’s royalties, this also makes a stronger case for Android system-on-a-chip developers, like Samsung and QUALCOMM, Inc. (NASDAQ:QCOM), to embrace the 64-bit chip, too. Apple’s move into the space, therefore, could inspire a fast chain reaction among competitors and amplify ARM’s benefits — hence, the surge in the stock price.

In the details
This is great news for ARM Holdings plc (ADR) (NASDAQ:ARMH) shareholders for more than one reason. Though Apple Inc. (NASDAQ:AAPL) already licenses technology from the microprocessor designer, the 64-bit instruction set merits higher royalty rates of 2% versus the 32-bit architecture licenses of just 1.5%, according to Raymond James’ Hans Mosesmann. That’s a sweet 33% jump in royalty revenue per chip.

Even more, there’s little doubt that the A7 will go into other future Apple Inc. (NASDAQ:AAPL) products, including iPads and, possibly, an iPod touch.

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