Others have claimed that forthcoming Intel (NASDAQ:INTC) Haswell SoC variants will be all conquering. The arguments are based on the projected power and energy consumption combined with Intel's manufacturing firepower. These articles and announcements have made zero impact on the steady ARM (NASDAQ:ARMH) market SP which is still trending higher. An enforced horizontal rest of 2 weeks gave me time to reflect that we all have had wrong perceptions of what is going on here. There is and will be no apocalyptic event where one weapon slays the competition in some mighty act of Armageddon. Excuse the language (and the "British" English spelling too) here, but there has been colourful use of warlike analogies by some authors.
Far from ARM and Intel being at each other's throats in the market, ARM just agnostically does what it does best. ARM provides a low cost rapid platform for SoC innovation that is driving a number of the world's fastest growing market spaces and it is ARM partners that make the direct market impact on the Intel market space, whether that be servers or mobile. Intel desperately needed the spur of keen competition from ARM to wake up from its obese complacency. Indeed the world needed ARM or there would have been no worthwhile mobile revolution to speak of. Now we need both companies to move the computing world forward in true open competition.
Intel Responds at Last
The huge changes in the overall CPU market that were caused by ARM could not be ignored and the Intel behemoth has thankfully swung belatedly into action and it will make a big impact where it intends, which will first secure and protect its premium priced markets and then eat into ARM's mobile space. However ARM will continue to innovate and I predict through innovation will carve a percentage of the server market away from Intel. There is just too much opportunity for low cost creativity here for that not to happen. Indeed we already see the beginnings of that using innovative "memcached" chips and organisations like Facebook, Baidu and other large server farm clients have been looking to the ARM server direction for quite some while eagerly awaiting 64 bit ARM designs.
It is believed by most authors here that Intel will carve a percentage out of the still fast growing mobile market from ARM and I too predict that will happen given all of the new fire power being brought to bear by Intel. These are just normal market maneuvers and are to be expected and welcomed as evidence of there being a real market. ARM partners remain excited because they still have an open strategy for innovation that makes it tough for Intel to follow or start using bullying tactics reminiscent of the beating up AMD received. The market is so potentially huge that both organisations will continue to grow even if respective actual market shares go down a little for either.
The Bottom End of the Market
By way of example I don't really see Intel playing at the "cheap as chips" Chinese clone market which is going to be massive in China and emerging economies and where a very competent looking complete Android tablet can be bought for as little as $45. Charbax on YouTube concentrates on finding all of the lesser local brands at shows and factory tours. These are all powered by ARM and almost never see the light of publicity outside of China and the developing world. I am not making a claim that these will save ARM - far from it, but they have never been mentioned here before and if you watch a few of his short videos you soon realise that there are so many obscure factories making cheap Android devices and tablets that it is really an eye opener.
This bottom end growth will be all ARM based where low commodity pricing rules and performance just needs to be adequate. Intel may dominate the top end, who knows, they have yet to achieve it, the Powerpoint looks great for the new architecture, but will they be good enough to displace a winning formula? The inertia of success built on ARM will take a huge amount of knocking before it turns to the Intel direction, but I don't see Intel taking no for an answer and some very high level deals will undoubtedly be done at the highest US corporate networking level that ARM will effectively be excluded from.
No Intel, No ARM
Does ARM need Intel? Of course! Without the big umbrella over the market that Intel provided after effectively becoming a monopoly supplier then there would have been less room for an innovative model such as that of ARM. ARM sees the Intel markets as the ultimate measure of success as achieved in the past and defines the top end target to aim at. We all know they could never dominate the top end like Intel did which would be a very unhealthy and unlikely outcome. The fact is, there are two suppliers here on different strategies and routes to market which are set to stay here for a very long time for very different reasons. This is actually extremely healthy for both these organisations and for the market in SoCs and for us as an investment opportunity.
A renewing compound growth market
Starting later this year the revolution in low powered server chips will be a huge market driver from 2014 in all energy-price conscious markets. Again thanks to ARM the combined forces of creativity of both Intel and ARM are now squarely aimed at reducing the energy consumption and running costs all of the world's server farms. Mankind benefits. We all know server farms are huge consumers of energy, and the prospect of closing fossil fuel power stations as a result of SoC innovation is just music to my ears.
So we have an already huge and growing server market simultaneously coupled with an upgrade replacement market. without getting involved in detailed forecasts, this spells big opportunities for all and a golden period of growth where both Intel and ARM will prosper side by side.
Considering the mobile market, we will see renewed growth spurts in low price markets as lower pricing opens less prosperous markets to smartphone capabilities in the developing world. This will be ARM driven in the main as it will be price conscious, not performance conscious.
Effect on stock prices
Meanwhile Intel has recently been priced like a poorly performing utility and is starting to re-emerge as a growth stock. ARM has in the opinion of Ashraf Eassa been way overvalued, and I predict will continue in that high value vein until and unless there is a visible performance stumble. The reason for this is that mobile is already less than half of ARM's revenue, and rapidly shrinking as the other areas grow and dominate such as smart devices, meters, internet-of-things and microcontrollers. Royalty per chip is also increasing as amply documented elsewhere, this is why it will continue to grow in value with a lofty PE. Too high? Mr Market says not, but I still hope for a pull back to get back in.
Maximising the Profit Opportunity
Looking forward, I remain optimistic that ARM devices will once again be made in Intel foundries when the emotion has died away. Indeed Intel would be foolish not to use its capacity to the full to maximise productivity and has already intimated it is open to such capacity utilisation under the new regime. FT Tech blog article on the new CEO Krzanich confirms these statements. He says:
"I've been basically running our foundry business for the last few years ... this is an area where we're well placed for growth and where we're going to go and grab customers that are strategically important," he told the FT.
So there is no war where an all out winner takes all, no secret weapon killing off competitors, just a few important outflanking skirmishes at the edges of fascinating markets as these grow to reach more and more of the world's population, served by both ARM and Intel as these two fine organisations compete for dominance, albeit indirectly.
I am now strongly bullish on both of these stocks.
Disclosure: I am long INTC, ARMH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Unusually for me I am more exposed to Intel via January Calls than i am to ARM where I have a token holding and await a lower buy back opportunity to increase that.