Advanced Micro Devices, Inc. (AMD), ARM Holdings plc (ARMH): 2 Semiconductor Stocks Worth Watching

Royalty and licenses boosting ARM’s revenue

Due to the requirement of high processing speeds in 3G & LTE smartphones and tablets, ARM Holdings plc (NASDAQ:ARMH) plans to increase production of its multi-core Cortex-A processors. Its Cortex-A15 processor in Samsung Galaxy S III, Note II, iPhone 5, and the fourth generation iPad generates 2% royalty, compared to 1.5% in their prior generation phones and tablets.

With the growing sales of smartphones, an acceleration in the royalty charge is expected in the second half of 2013. Cortex-A will attain royalty revenue of $180 million per quarter in the upcoming three years. It will also feature ARM Holdings plc (NASDAQ:ARMH) Mali graphics solutions, which will add another 1% to the chip royalty rate. Due to the increasing demand of smartphones and Digital TVs, Mali shipments increased 500% year over year in first quarter.

ARM Holdings plc (NASDAQ:ARMH) signed 22 new licenses in the previous quarter. These included nine Cortex-A series chips, seven latest generation Corex-A50 series, three v8 big.LITTLE, and three Mali licenses, including Skymir, ARM’s most advanced processor. In all, ARM has 956 licenses and, out of these, 40% of the licenses were added in last two years. If other companies using ARM’s chip designs produce more chips, ARM Holdings plc (NASDAQ:ARMH)’s revenue will also increase rapidly. The company earned 60% of its licensing revenue from its growing licensing backlog. With two-thirds of the backlog consisting of long-term licenses, it will provide a continuous flow of revenue for the next two years.

Conclusion

Advanced Micro Devices, Inc. (NYSE:AMD) is facing difficulties in PC-related sales. With the focus on the gaming console segment, it is trying to reduce its risk by diversifying its portfolio. Overall, I recommend holding this stock and waiting for more clarity about the performance of its non-PC segment.

On the other hand, ARM Holdings plc (NASDAQ:ARMH) will continue to experience strong licensing fees from its Cortex-A processors. It will also benefit from its licensing backlog and the signing of new licenses. I recommend buying this stock for the long-term growth.

Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft Corporation (NASDAQ:MSFT).

The article 2 Semiconductor Stocks Worth Watching originally appeared on Fool.com.

Madhu 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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