ARM Holdings plc (ADR) (ARMH) Still Flexing; Can Intel Corporation (INTC) Muscle In?

Conclusion

1). Because ARM’s IP is widely available to all licensees, the company is only able to capture a small part of the value pie because its IP does not offer its customers much differentiation.
2). ARM’s physical IP division has been a drag on the firm’s overall profitability and it could take some time before the division contributes materially to ARM’s bottom line.
3). Intel is striving to reduce the power consumption needs of its x86 architecture via its Atom chips, in turn becoming a more credible threat to ARM’s ultra-low-power architectures in the mobile chip market.
4). Although ARM will benefit from greater, more-advanced chip content in smartphones in the near term, its customers will probably see price declines over time as the smartphone market matures.

Perhaps more important, ARM still has plenty of room to see explosive growth from the mobile end market in the years ahead. Higher-end smartphones require greater, more advanced semiconductor content, which allows ARM to earn three to five times greater royalties from the sale of a smartphone than a basic handset. I don’t see the shift toward smartphones slowing anytime soon, and I expect ARM’s IP to continue to make these all-in-one devices possible.

All in all, ARM may generate hefty profits if these markets take off in the years ahead, but the firm’s profitability may also flat line or come crashing down if the firm fails to live up to these lofty expectations.

Ahsan Aslam Khan has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel.The article ARM Still Flexing; Can Intel Muscle In? originally appeared on Fool.com and is written by Ahsan Aslam Khan.

Ahsan 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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