The semiconductor industry works as an enabler, driver, and indicator of technological progress. Any development in this sector will result in upgradation and fast processing of our work through mobile phones, personal computers, tablets, gaming consoles, and more. Around 60% of the total semiconductors are used in the computing and consumer end markets. In this article, I will highlight two semiconductor companies, Advanced Micro Devices, Inc. (NYSE:AMD) and ARM Holdings plc (NASDAQ:ARMH), which are focusing on smartphones and gaming consoles to drive their revenue.
Focus on gaming console chipsets to offset falling PC demand
Slowing demand in emerging markets and cannibalization by tablets and smartphones have led to a downfall in PC sales. Globally, PC shipments declined 13.9% year over year in the first quarter, displaying the worst fall in the last two decades. Advanced Micro Devices, Inc. (NYSE:AMD) has around 85% exposure to the PC segment and declining PC sales are a matter of concern for the company.
In order to alleviate this impact, it is focusing on cost cutting and non-PC opportunities like the gaming console segment. The company is targeting to bring its operating expenses to $450 million in the third quarter of 2013, down from $600 million in the first quarter of 2012. This will be majorly driven by its reduction in headcount by 15% in the fourth quarter of 2012.
It will also get a revenue boost from the recently announced Sony Corporation (ADR) (NYSE:SNE) PlayStation 4, which incorporates Advanced Micro Devices, Inc. (NYSE:AMD)’s ”Jaguar”, a semi-custom 8-core APU processor featuring an on-board GPU. It will deliver a computing speed of 1.843 teraFLOPS at an 800 Mhz clock speed, resulting in 300% better graphic performance compared to the present chipset in the PS3.
Advanced Micro Devices, Inc. (NYSE:AMD) has priced this processor around $70. The new PlayStation is expected to be released by mid-2013. According to GameStop Corp. (NYSE:GME)‘s public polls hosted on its website, 34% of its customers intend to purchase the PS4 over Microsoft Corporation (NASDAQ:MSFT)‘s Xbox and Nintendo’s newest system. Sony Corporation (ADR) (NYSE:SNE) plans to price the PS4 around $400 to make it competitive against Xbox One’s pricing of around $500.
Despite the fact that Xbox 360 arrived one year earlier than the Sony PS3, Sony Corporation (ADR) (NYSE:SNE) was able to sell 77 million units in comparison to Xbox, which has sold 76 million units since its launch. It is expected that this trend will continue with PS4, too. This will provide AMD a huge revenue opportunity from the sales of PS4 in the coming six years. Apart from that, the upcoming Xbox One will also have an Advanced Micro Devices, Inc. (NYSE:AMD) chip, which will be released in late 2013 or early 2014. Overall, the non-PC chipset division contributes around 15% of the revenue, and with the increasing popularity of gaming consoles, it is expected to reach 20% by the end of 2013.
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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