Intel Corporation (INTC) and ARM Holdings plc (ADR) (ARMH) Entering a Price War?
By in News
Published: June 25, 2013 at 1:22 pm
INTEL CORP (INTC)
23,88 USD
+1,27% | +0,30
25/06/2013 22:00
One of the largest investing stories over the last several years is the decline of the PC and the rise of mobile computing. One of the companies with the most to lose is Intel Corporation (NASDAQ:INTC) which controls 85.2% of the PC microprocessor market and receives 64% of its revenues from that sector (J.P. Morgan). Furthermore, Intel Corporation (NASDAQ:INTC) made a large bet on Ultrabooks that hasn't panned out yet, and likely never will.
ARM HOLDINGS PLC ADS REP 3 ORD GBP0.05 (ARMH)
36,31 USD
+1,99% | +0,71
25/06/2013 22:00
However, this is all old news, in fact even the capabilities of Intel's new Haswell processors and next-generation Atom processors and what that may mean for Intel Corporation (NASDAQ:INTC) and ARM Holdings plc (ADR) (NASDAQ:ARMH) is old news. Intel's stock has risen substantially, while ARM Holdings plc (ADR) (NASDAQ:ARMH)'s has fallen.
However, this change has not been as big as some analysts argue. A few even argue that Intel will eliminate the ARM Holdings plc (ADR) (NASDAQ:ARMH)'s architecture's like it did PowerPC. The key point here is that the success that Intel has happened because of its technological edge. Over the last several years, Intel Corporation (NASDAQ:INTC) dumped billions of dollars per year into researching ever better microprocessors and performance has risen proportionality. They managed to out-research IBM, which is quite a feat, and may well out innovate ARM Holdings plc (ADR) (NASDAQ:ARMH). However, the PC and mobile sectors do not work the same way.
How will ARM and Intel compete?
The historical key in PC's has been strong demand for processing power. Consumers will pay to use their PC's in computationally complex ways. The demand for performance in the mobile market is much smaller. Consumers just don't push the envelope as far. This is precisely why ARM has done so well. It's true that consumers are willing to pay for extra performance in the form of longer battery, and its Intel's solution to this problem that excited people so much. However, how much battery life does someone really need? Again, once we get all-day battery life, we'll be hitting diminishing returns pretty hard. We will soon hit that point.
So if Intel Corporation (NASDAQ:INTC) and ARM Holdings plc (ADR) (NASDAQ:ARMH) designs are both powerful enough and efficient for most users, how will they compete? There is only one logical answer -- Price. Herein lies the problem for Intel. Historically, it has always been the more expensive chip producer. It has focused on out-performing its competitors, while letting them under-price it. However, if it wants to compete in the mobile space long-term. It simply can't do that. It is already heading in that direction. Its new processors are substantially cheaper than previous iterations. Furthermore, most of the potential smartphone growth is in the developing world in places such as India and Brazil.. These consumers there don't already have a smartphone because they are poor, and poor consumers are more responsive to price than wealthier ones.
What does this mean for Intel
No matter how you slice it, if Intel Corporation (NASDAQ:INTC) and ARM Holdings plc (ADR) (NASDAQ:ARMH) enter a price war, this will cut into both companies' margins. Intel simply won't be able to keep them around 60%. They are already starting to fall, going from 64% to 56.2% (ft.com). This will likely have two main outcomes. 1) It will cause downward pressure on Intel's investment and hence its ability to create better chips than its competitors. 2) It will reduce Intel's profits, and hence its ability to return value to shareholders. Intel will likely remain profitable, but it won't have the moat it had.
Potentially better opportunities
Since we're looking at was is gearing up to be a fiercely competitive fight in the microprocessor market, the products will inexorably get better and likely get cheaper. This will cut into Intel's and ARM's margins, but it will also create a better, cheaper product for the consumers. Many other companies will directly benefit from this.
The most obvious one is Apple Inc. (NASDAQ:AAPL). It operates precisely in the high-end mobile market that will be the most competitive. Instead of basically being stuck with ARM chips, it will be able to choose between Intel and ARM chips. Which one it chooses will have a major effect on that those companies, but Apple Inc. (NASDAQ:AAPL) wins either way. It can offer a better product without having to raise the price at all.
Another slightly obvious one is Google Inc (NASDAQ:GOOG). It benefits in a multitude of different ways. First, its able to produce better quality and less expensive products through its Motorola Mobility and Nexus divisions. Furthermore, and more importantly for its bottom line, these chips will benefit consumers worldwide causing many of them to get online sooner and spend more time there. This feeds straight into Google Inc (NASDAQ:GOOG)'s advertising business, and thereby make money hand-over-fist.
Other companies such as HTC and Samsung will also benefit a great deal from this competition for similar reasons. Sadly, they are not listed on U.S. exchanges which makes investing in them riskier. To wrap things up, Intel Corporation (NASDAQ:INTC) and ARM Holdings plc (ADR) (NASDAQ:ARMH) are entering into what is essentially a zero-sum game in the mobile space. This will cause both of their margins to shrink. However, no matter how that fights ends up, the firms who buy their products will be better off, and so it might make sense to invest in those companies instead.
The article Intel and ARM Entering a Price War? originally appeared on Fool.com and is written by Paul Sangrey.
Paul Sangrey has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Intel. The Motley Fool owns shares of Apple, Google, and Intel. Paul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
Intel Corporation (NASDAQ:INTC) has dominated the microprocessor industry for two decades. Now there are rising fears that Intel may have trouble competing with emerging processor design firm ARM Holdings plc (ADR) (NASDAQ:ARMH), whose chipset designs have become dominant in mobile.
ARM’s processor designs populate most smartphones and tablets. The line between PCs and mobile devices is blurring, with ARM attempting to move upstream while Intel tries to extend its presence downstream with its Atom chips. The emergence of the tablet has provided a battleground for the two, and ARM has been much more successful so far.
There is evidence that ARM-based tablets are cannibalizing PC sales, which in turn has pressured Intel's processor sales. ARM has been highly successful in chips for mobile devices and tablets because of the low power consumption of its designs, something that Intel has been unable to match despite being able to offer higher processor performance.
Nonetheless, the Atom processors are becoming much more competitive in power efficiency, which should allow Intel to achieve more design wins in tablets and smartphones, and ultimately encroach upon ARM's turf in the next year or two.
Also, Intel also bolstered its capabilities as a chip supplier for mobile devices when it bought Infineon's IFNNY wireless chip business in 2011. More recently, the firm scored a key design win when Samsung decided to use Atom for the 10.1-inch version of its Galaxy tablet.
ARM holds an extensive library of microprocessor intellectual property, and has particular expertise in low-power, high-performance chip architectures. It's IP is the backbone of most processors used in handsets and mobile devices today, and strong tailwinds from the shift to higher-end smartphones and tablets should bode well for ARM in the years ahead.
ARM essentially develops the blueprints that allow a variety of the world's leading chipmakers, such as QUALCOMM, Inc. (NASDAQ:QCOM), to design and actually manufacture many of its semiconductors. ARM's IP is the solution of choice for processor chips used in the handset industry, where low power and longer battery lives are critical factors. Intel is working hard to get into the mobile market, and it faces some long-term competitive obstacles against Qualcomm in the chip making market.
Qualcomm displaced Intel as the wireless baseband chip provider in all of Apple's iPhone 4S and 5 devices, which should drive higher chip sales in the years ahead, and also give the Qualcomm tremendous diversity to Apple, Android, and Windows Mobile devices.
Qualcomm’s design win in many of Samsung’s upcoming Galaxy S4 handsets gave the company a shot in the March quarter, and will contribute to solid revenue in the current quarter as well. Meanwhile, licensing revenue, or QTL, was up 17% sequentially.
On the other hand, the recent weakness in the global PC market has put pressure on demand for Intel’s processors, and it showed in its first quarter report.
No surprise in Intel Corporation (NASDAQ:INTC)’s and ARM Holdings plc (ADR) (NASDAQ:ARMH) first quarter reports
Intel saw headwinds from continued softness in PC processor demand, as well as first quarter seasonality. Revenue was $12.6 billion, down 7% sequentially, and a decline from $12.9 billion a year-ago. In Intel's PC processor segment, sales were $8 billion, down 7% sequentially, and down 6% year-over-year.
ARM Holdings reported strong first-quarter earnings and gave investors a solid second-quarter outlook. I believe that the company's stock price reflects overly optimistic assumptions about long-term royalty growth, particularly from PCs and servers.
ARM's revenue for the March quarter was GBP 170 million, up 4% sequentially and up 29% from the year-ago quarter. Processor licensing revenue was GBP 52 million, up 26% from the year-ago quarter as ARM continues to strike new IP deals for its big little technology, advanced Cortex-A53 and A57 processor cores, and Mali graphics IP. Processor royalty revenue was GBP 80 million, up 37% from the year-ago quarter, thanks to healthy shipments of processors using ARM's Cortex-A and Mali IP during the seasonally strong December quarter. In turn, ARM earned a hearty 38% operating margin this quarter, up from 35% in the December quarter.
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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
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