Submitted by Investing Daily as part of our contributors program.
U.K. Based Chipmaker About to Make a Big Move into PCs
By: Chad Fraser
High unemployment and the sputtering economy are prompting many consumers to cut back on discretionary purchases. Their technology budget, however, still seems to have few bounds.
That’s particularly true when it comes to mobile devices like smartphones and tablet computers. Just look at the numbers:
According to market research firm IDC, smartphone manufacturers shipped 144.9 million units in the first quarter of 2012, up 42.5% from 101.7 million a year earlier. For the full year, IDC expects 660 million smartphone shipments, up about 33% from 2011. By 2015, they should cross the 1-billion mark.
Tablet computer sales are also booming: IDC expects manufacturers to sell 142.8 million of these devices this year. By 2016, the firm sees that figure topping 222 million units.
Mobile Device Market Remains Hotly Competitive
The challenge for investors is to find the best way to profit from this explosive growth. The most straightforward approach is to buy shares of device makers, such as Apple (NasdaqGS: AAPL), maker of the iPhone and iPad, or Google (NasdaqGS: GOOG), whose Android operating system powers a wide range of mobile devices.
Yesterday, Google also unveiled its own tablet, the Nexus 7, which will sell for around $200 and directly compete with Amazon.com‘s (NasdaqGS: AMZN) low-priced Kindle Fire.
However, just because a particular device dominates the mobile market today doesn’t mean it will tomorrow. A new player could enter the market at any time with a revolutionary new product that quickly captures consumers’ attention. Just look at how swiftly former market leader Research in Motion (NasdaqGS: RIMM) fell after the iPhone was introduced.
ARM Holdings Is the Leading Mobile-Device Chipmaker
Another way to profit from rising sales of smartphones and tablets is to buy shares of companies that make the chips that power these devices. A major player in this area is U.K.-based ARM Holdings (NasdaqGS: ARMH).
Unlike most chipmakers, including its main competitor, Intel (NasdaqGS: INTC), ARM doesn’t make its own chips. Instead, it licenses its designs to manufacturers like Nvidia (NasdaqGS: NVDA), who pay ARM Holdings a one-time licensing fee plus a royalty on every chip produced.
This business model is a big plus for ARM, because it allows the company to focus on designing next-generation chips without having to manage an entire manufacturing division. It also gives ARM the opportunity to work more closely with its clients to design chips to meet the specific needs of their products.
Right now, ARM Holdings’ chips power 95% of the world’s mobile devices, including the iPad and iPhone. The most recent device to incorporate ARM chips is the Microsoft Surface tablet computer, which was unveiled to largely positive reviews just last week.
The reason behind ARM Holdings’ success in the mobile space is its focus on low-power chips. That’s crucial for extending battery life and, more importantly, keeping the chip’s temperature down. Because there isn’t room for additional cooling systems inside a smartphone, chips must be designed to stay cool on their own. Otherwise, they will overheat.
ARM Is Going Beyond Mobile Devices
Now, ARM is looking to adapt its power-sipping chips for other applications, such as servers, an area that has long been dominated by Intel. But ARM is taking a cautious approach, aiming to control just 5% to 10% of the server-chip market by 2016.
“We have seen a lot of demand,” said Graham Budd, the company’s chief operating officer, in a June 5 article on MarketWatch.com. Budd also noted that Dell (NasdaqGS: DELL) and Hewlett-Packard (NasdaqGS: HPQ) are now testing server chips designed by ARM.
Cutting the power that chips use has long been essential in mobile devices, but this focus could help give ARM an edge in servers, too. Consider that most servers must run 24 hours a day, so even a small cut in power use could result in big savings for businesses over a period of years.
Mobile Chip Market a Tough Nut to Crack for Intel
Intel, for its part, is also making a run at ARM’s core market (the most expensive model of the Microsoft Surface, for example, will run on an Intel chip), but so far hasn’t been able to make much of a dent in ARM’s market share. That’s mainly because mobile chips present an entirely different set of challenges than Intel’s core PC chips, as Investing Daily editor Jim Fink wrote in early 2011:
“Intel’s strength is in developing the fastest, most powerful microprocessors. That strength is not applicable to smartphones. ARM’s chip technology may not be the absolute fastest, but it is fast enough for smartphones and the applications needed by the average consumer.”
Earnings Keep Rising
ARM’s sales continue to rise with mobile device demand: in the first quarter of 2012, overall sales jumped 13%, to $209.4 million from $185.5 million a year ago. Licensing revenue rose 20%, to $76.8 million. Royalty revenue was up 8%, to $106.0 million.
During the quarter, 1.1 billion ARM-designed chips were shipped into mobile devices, about the same as last year. Roughly 800,000 chips for other devices were also shipped, up 15% from a year ago.
Thanks to the higher sales, ARM’s earnings per share rose 23%, to $3.36 from $2.73.
