Let’s be honest for a moment: we don’t all understand the tech world.
Sure, we all get excited when we hear about the next high-tech gizmo, we all carry smartphones and/or tablets, and it’s hard to imagine life without the majesty of the Internet. But when it comes down to the all the technical details, we’re practically in the Bermuda Triangle; things are hard to understand. All these chips, processors, servers, cloud computing, and so forth just don’t make sense to the average consumer.
This shouldn’t stop you from investing in the tech world. After all, there is no other sector where you can potentially become rich as fast as you can in technology. Just ask the guys who started their tech companies and became multimillionaires before even hitting 30. It’s just a matter of understanding where the action is and where to put your money.
That said, the place you want to be looking at right now is the chip industry, where things are about to significantly heat up.
The two kingdoms
There are two big competing companies in this industry: Intel Corporation (NASDAQ:INTC) and ARM Holdings plc (ADR) (NASDAQ:ARMH).
Intel Corporation (NASDAQ:INTC) dominates the PC market, with products in just about all PCs, Macs, and servers.The company is known for being an excellent manufacturer and always trying to keep chip costs down.
ARM, on the other hand, is the main designer for chips in mobile devices: smartphones, tablets, and so forth. Unlike Intel, it doesn’t make its own chips; that task falls to a bunch of different companies, including Apple Inc. (NASDAQ:AAPL), Samsung, Qualcomm Inc. (NASDAQ:QCOM), and NVIDIA Corporation (NASDAQ:NVDA).
Courtesy: Apple Inc. (NASDAQ:AAPL) Press Info
So there is a platform for PC devices and a platform for mobile devices, each one dominated by a particular chip designer. So far, Intel Corporation (NASDAQ:INTC) and ARM Holdings plc (ADR) (NASDAQ:ARMH) have ruled their respective kingdoms quite well, bringing in profits and growth.
Both companies, however, have decided that they want a chunk of the other market: Intel wants its chips to be in smartphones and tablets, even if means competing against ARM while courting the aforementioned companies. On the other side, ARM would like to see its chips in PCs, and is gathering its allied companies to challenge Intel’s grip on data centers.
The stage is therefore set for a war between these two kingdoms, with the winner (and anyone invested) becoming very rich.
The upstart
As a sign the chip makers are preparing for this new battle, they are both switching out their CEOs. Intel’s CEO, Paul Otellini, will retire in May, although a successor has yet to be named. Meanwhile, ARM has announced that CEO Warren East will also retire. In July, he’ll hand the reigns over to Simon Segars, the company’s current president.
At the moment, the impression given is that ARM Holdings plc (ADR) (NASDAQ:ARMH) has the advantage over Intel. After all, at least the mobile play seems to have a clear line of succession ahead while Intel has spent months trying to figure out who its next boss will be.
Furthermore, departing CEO Warren East leaves behind an ARM Holdings that’s vastly stronger than it was when he arrived. A quick look through their annual reports will support the following: during his rule, Mr. East has has increased revenue by $700 million, grown sales by around 300%, and market capitalization has made an unheard-of increase of over more than 2,000%.
The company’s success is obviously reflected in its stock price, which has climbed phenomenally, especially in the last few months. Most recent news is that Jefferies upgraded the stock to a buy. As for challenging Intel, that has so far been met with some success. ARM worked with Microsoft to support Windows RT.
So ARM Holdings plc (ADR) (NASDAQ:ARMH) is doing great right now. It is the young upstart that seeks to replace the old, traditional ruler of the industry But will it in the future? That’s where things begin to look complicated.
The Titan
For now, let us briefly switch over and take a look at Intel.
Most people can tell you that the company is undervalued at its recent share price of $21.76. It has solid fundamentals, an instantly recognizable brand name, a single-digit trailing P/E ratio, and a very nice dividend yield of 4.2%. Trefis values it at $29.19. So already, you could say that it’s a buy.
So why is the stock so low?
The main reason is that consumer demand for PCs (Intel’s main market) is at a low, given that everyone seems to be embracing mobile devices. Smartphones and tablets are hot, especially since they use low-powered chips — designed by ARM, no doubt — where Intel has little presence.
So to the rest of the world, Intel Corporation (NASDAQ:INTC) missed the mobile revolution and is in its twilight years (along with computer giants Dell inc. (NASDAQ:DELL) and Hewlett-Packard Company (NYSE:HPQ), the former of which is currently facing an epic buyout battle). Seeing how Intel’s share price has declined in the past year by 23.48%, it can’t be hard to fault such thinking.
However, let’s take a step back and think: “missed” opportunity implies that there will not be another one. In this case, the opportunity is still there: Intel still can, and will, get into the mobile-chip market. The opportunity hasn’t gone anywhere. So instead of thinking in terms of “catching up,” we should think of this in terms of “expanding” into mobile devices.
That shouldn’t be too hard for Intel, which is known as the titan of high-tech engineering design and high-quality chip manufacturing. After all, they’re pouring cash into R&D.
Plus, they’ve already integrated their technology with Google’s Android phone OS; so successfully that the latter company announced “that all future releases of Android will be optimized for Intel x86 architecture.” Even though it is the individual phone manufacturers who choose which chips to incorporate with their phones, this is still a solid victory.
And that’s just the beginning. Intel is also entering partnerships with Chinese giants ZTE and Huawei, as well as Motorola and Lenovo. If these emerging giants all carry Intel’s chips, then it only reinforces the notion that Intel is indeed deadly serious about going all in with regards to mobile.
The War
So if these two companies go to war, as it seems they are, who will win?
Simple answer? Intel.
It has too much of an advantage over its competitors and has unparalleled influence, power, and wealth. Its home territory is very secure, and ARM Holdings plc (ADR) (NASDAQ:ARMH) will have a hard time penetrating that turf.
Intel’s future product releases will also strengthen the company’s already strong position. For example, the new Avoton and Bay Trail chips coming out later this year are (from what I can understand) better than those offered by ARM.
And all this assumes that none of the companies producing ARM’s chips decide to switch. Imagine for a moment: what if, a few months from now, Apple Inc. (NASDAQ:AAPL) decide to start using Intel chips instead of ARM?
Things are starting to look that way. At the moment, Apple relies on Samsung to get its ARM-designed chips for it’s iPhones and iPads. The obvious problem here is that Samsung is one of Apple’s direct competitors, if not its biggest, in the smart phone market. Relying on your mortal nemesis to provide the chips you desperately need doesn’t seem to be the smartest business move. So switching over to Intel chips means that Apple wouldn’t have to rely on Samsung as much.
Consider the costs saved from Apple’s point of view: a deal with Intel Corporation (NASDAQ:INTC) would allow it to diversify its supply chain, thereby bolstering its margins by fostering greater competition in its supply chain. Not only that, but it means that Apple would have greater control over its supply chain and reduce its own risk at a time when its iPhones and iPads are in high demand.
So there is clearly plenty of incentives for Apple Inc. (NASDAQ:AAPL) to eventually switch from Samsung-produced ARM chips towards Intel-produced chips. This phenomenon will only grow as Intel continues to improve its mobile chip designs so they consume less energy and work more efficiently (all the while being cheaper). It’s only a matter of time before this move occurs.
If that were to happen, ARM would be placed in a very bad position, as it would lose an immense amount of royalty revenue from its intellectual property for the chip designs. And considering the way things are angling, as previously mentioned, that just may happen.
My belief is, therefore, that Intel Corporation (NASDAQ:INTC) will grow significantly at ARM’s expense, despite current appearances. So if you want to make money off of this “war” over the coming months and years, then long Intel and short ARM Holdings plc (ADR) (NASDAQ:ARMH).
The article The War over Chips originally appeared on Fool.com and is written by Carlos Roa.
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