As Advanced Micro Devices (NYSE:AMD) and Intel (NASDAQ:INTC) implement their next-generation of CPUs, a larger emphasis has been placed on performance per watt this cycle, making both viable for mobile solutions. This means two new competitors entering the mobile space at roughly the same time, and both of these new competitors are based on x86 architecture, not ARM Holdings' (NASDAQ:ARMH) RISC processors. Until now, ARMH has enjoyed being the only major player in this space. ARMH chips are used in 95% of cell phones world wide and 40% of mobile computing devices (which includes tablets), according to its website, and these areas account for a large portion of ARM's revenue growth.
Why is architecture important for investors?
ARM Holdings has been a tremendous stock. It has had healthy EPS positive surprises every quarter since Q3 2011 (that's as far back as I looked), and steady EPS growth. Not to mention a beta of less than 1, and 688% ROI over a five-year period. Taken from the earnings transcript on SA:
The continued growth of the smartphone and tablet markets, along with a substantial demand for technology in other end markets like microcontrollers and digital TVs, helped increased our royalty revenues by 33% year-on-year this quarter, and that was significantly ahead of the overall semiconductor industry.
A large portion of ARM Holdings revenue growth is based on the mobile market, where Intel and AMD are going to start vying for market share. Right now ARMH has a P/E of 85.5x, compared with INTC at 12.2x, and an industry standard of 23x. ARMH's high P/E speaks on behalf of its investor sentiment, but how will its share price reflect a loss of market share and reduced earnings going forward?
Multiple solutions in One Device
Moving tablets and smartphones to x86 architecture will give consumers access to all of their favorite software, without having to port that software to run on an ARMH processor. For Android users, Intel is working to bring your OS to x86. Tom's Hardware, Anandtech, and ZDnet are some of my favorite websites for researching tech and benchmarks that I choose before buying a device. If anyone would like to verify my claims, those are good starting points.
This article on ZDnet describes AMD's turbo dock technology. Essentially, when your tablet is plugged into the dock (a keyboard with another battery), it ups the power envelope of the CPU to give it more umph. If it's not plugged into the dock, it uses less power to extend battery life when operated in tablet mode. See Tom's Hardware reviews the Acer Iconia 510. You'll notice that on the benchmarks that the last generation of Intel's Atom was outperforming Nvidia's (NASDAQ:NVDA) Tegra 3 (ARM-based architecture) in almost every instance, and the Atom based on Silvermont architecture is a vast improvement in the Atom line. The negative reviews in that article reflect the Acer Iconia, not Intel. The last article I will link to, here, is to Intel's website for their Android 4.2 development kits.
Connecting the Dots
The main concerns I've heard as to why Intel and AMD can't compete in the tablet space is due to power consumption and pricing.
Concerning power consumption, the benchmark I linked to above demonstrates that the Atom processor prior to Silvermont was capable of Tegra 3 performance and only slightly worse battery life. The AMD processor featured in Sony's (NYSE:SNE) PS4 is a variant of AMD's Temash APU. The Temash APU is geared for tablet use. Both Intel and AMD will have CPUs with power draws that make them suitable for tablets. And as an added bonus, AMD's turbo dock option will allow users more processing power with the optional keyboard docking station attached.
As far as pricing -- Intel Atom processors are much cheaper than Intel's Core line of processors. My estimate is less than $75 per chip, but I haven't seen anything official yet (any readers feel free to link to articles in the comment section to validate/disprove). The cheapest AMD APU now sells for around $40. For perspective, Microsoft's (NASDAQ:MSFT) cloud version of the Office line of products is $99 a year for up to five devices, but the requirement is for Windows 7 or higher, therefore it does not look like it is available for Windows RT users. Any extra cost above an ARMH processor will be moot to someone that wants access to their traditional x86 library of software. And if Microsoft Windows is too expensive, I hear Android OS is pretty cheap, which will help bring the more powerful offerings from AMD and Intel much closer in pricing to ARM powered tablets and mobile phones. This article released in late April from CNET.com outlines Intel's plans of $200 laptops featuring the Android OS.
AMD and Intel have both been losing revenue due to decreased demand in the PC market. Meanwhile, ARMH has enjoyed revenue growth, and attributed a portion of that growth to its mobile offerings. When ARMH faces real competition in the mobile space for the first time from x86 devices, will the 85.5x P/E still seem viable? ARMH does plan on entering the server market, so it does have potential to develop another source of revenue, which could offset the potential loss of revenue if x86 devices gain sizable market share in tablets and smartphones.
AMD and Intel entering in the mobile space will offset the revenue loss from declining PC market share, at the same time making them less reliant on the traditional PC market. As of April 30, only .75% of ARMH shares were held short. As x86 tablets and smartphones start showing up at my local coffee shop, I will start trawling to sites such as Amazon.com, Newegg.com, and Best Buy to see how users like the products. If these products are widely adopted and with good reviews, and if ARMH isn't able to penetrate the server space, it could present a profitable short idea. If ARMH is losing market share in the mobile space and unable to gain traction in the server market, while Intel and AMD are being accepted in the mobile space, there is also the potential for a valuable long position in INTC and AMD.
Disclosure: I am long AMD, INTC. 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: I may initiate a short position in ARMH if I feel their company is losing market share in the mobile space.