The shift towards mobile computing is a boon to the chip makers. The companies that were earlier focused on manufacturing PC chipsets have shifted their focus towards mobile phone chips and microprocessors. I have shortlisted three chip-making and designing companies -- Intel (INTC), ARM Holdings (ARMH), and Qualcomm (QCOM) -- that have their future strategies laid on mobile growth. These companies have strong product lines of mobile chips and processors. Additionally, these companies give good returns to their shareholders.
Intel has made a good move into mobile via its new Silvermont CPU architecture, which includes Bay Trail for tablets, Merrifield for smartphones, Avoton for data center, and Rangeley for networking. The 22-nanometer system on a chip, or SOC, platform is three times faster than its predecessor, Saltwell (32-nanometer), and five times more power efficient due to Intel's 3-D transistors. Unlike a 2-D planar gate, 3-D Tri-gate uses a three-dimensional silicon fin that rises up from the silicon substrate, allowing Intel to put a current controlling gate on each side of the fin. Silvermont is the first product that takes the performance and performance-per-watt caps from ARM models of Qualcomm, Nvidia, Apple and Samsung. The new multi-core architecture uses up to eight cores and enhances performance for higher bandwidth, resulting in improved performance, virtualization, and security management.
Intel also follows Moore's Law, which means it has the potential to make chips smaller, faster, and more power efficient with each process upgrade. In this step, it is planning to reduce the Silvermont mobile chips to 14 nanometers. Its dual-core CPU design helps in improving multi-tasking performance and saving energy consumption more than the common quad-core design. This makes Intel's chip an interesting choice for handset manufacturers. Until 2012, Intel had a minimal presence in the mobile chip market of less than 1%. But the release of Merrifield in the second half of 2013 will increase its market penetration. According to IDC, smartphone shipment will reach 918.6 million units in 2013, up 27.2% from 2012. Further, it will reach to 1.5 billion units in 2017. Seeing this explosive growth in the smartphone market, Silvermont is set to improve Intel's earning power in 2014.
Intel has a long history of dividend increases and share buybacks; together these have returned over $112 billion to shareholders in the last decade. In 2012, Intel spent $4.4 billion on dividends, $4.8 billion on buybacks, and earned $11 billion of net income. It returned over 83% of its net income to shareholders last year. To strengthen its cash position, the company took on an additional $6 billion of debt in December 2012 to facilitate the buybacks. It also declared a quarterly dividend of $0.225, or $0.90 on an annual basis, with a dividend yield of 4.15%. Going forward, the company is targeting to return 40% of its free cash flow in the dividend program.
Cortex-A is the winner
Unlike Intel, which designs, manufactures, markets, and sells its own chips, ARM Holdings only designs the mobile chips as per the demands of Qualcomm, Nvidia, Apple, etc. It earns a majority of its revenue in the form of licensing fees from these clients. Almost all mobile phones, except the ones being produced by Intel, use ARM Holdings-based processors. Last year, ARM Holdings achieved more than 90% penetration of mobile handsets, as well as 10% of the mobile computing market - which includes laptops, notebooks and tablets.
During 2012, ARM's total market share rose to 32%, up from 29% in the 2011. Along with that, shipments of ARM's advanced Cortex‑A family processor more than doubled to 765 million. About 75% of all smartphones had a Cortex-A family processor in the main chip. Cortex‑A processors generate a higher percentage per-chip royalty than previous ARM families, which helped ARM's Dollar royalty revenue to grow by 17% at a time when the overall industry declined by 2%.
ARM Holdings also signed a new deal with TSMC, or Taiwan Semiconductor Manufacturing Co., in the form of Cortex-A57. The new chip will use TSMC's 16-nanometer FinFET technology and will bring three to five times the CPU power of current chips for the same battery life at the same speed. This will also solidify its presence in the mobile processor manufacturing market. According to Canaccord Genuity's Matthew Ramsay, ARM will increase its microprocessor's market share by the end of this decade to more than 50%, from 32% at present, and the company's license fee will also rise to 1.5% next year, from 1.3% last year, due to higher Cortex-A penetration. And as its licensing fee is the significant part of revenue, I see strong potential in this company for long-term growth.
In the last five years, ARM Holdings shares went up almost nine-fold and dividend per share has more than doubled. ARM Holdings has a good dividend history in the last five years. The company even posted double-digit expansion in 2009 despite a slight fall in earnings. From 2009 to 2012, it has shown progressive dividend growth from 2.42 pence, or $0.04 per share, to 4.5 pence, or $0.07 per share. The current PEG ratio of less than one also reflects that it's still potentially undervalued. Brokers expect earnings to rise 36% this year and 24% in 2014, which will further support healthy dividend growth.
Strong line of processors
Qualcomm is the long-term evolution, or LTE, chipset leader in the smartphone processor manufacturing market. In 2012, Qualcomm held nearly 86% of the total market share of LTE chipsets. It is also leading the mobile device GPU, or graphics processing unit, market with over 25% of the market share last year. Qualcomm licensed its designs from ARM Holdings. In the second quarter of 2013, Qualcomm reported strong revenue from licensing and wireless business. Added to it, Qualcomm shipped 173 million units of mobile chips, up 14% from the previous year. As a result, its revenue rose 24% year over year to $6.12 billion. The company expects third-quarter revenue to climb by at least 25%. As Qualcomm is used in HTC One, many Galaxy S 4 models, and the Optimus G Pro, it is very likely that this company will achieve its future prospects.
The company has a strong S4 line of processors like MSM8960, a dual-core chip with integrated LTE, and the APQ8064, a quad-core processor without the integrated modem. The dual-core version is present in all the high-end Windows Phones, Samsung Galaxy S III, and other Android phones. The quad-core version, sometimes called the Snapdragon S4 Pro, is present in a number of high-end phones like Google Nexus 7, Nokia Lumia 925, Sony Xperia Z, etc. Additionally, its most awaited Snapdragon 800 is due in the second half of 2013, which will further boost its market presence. It is produced on TSMC's 28-nanometer HPM, or high performance for mobile, process, which enables the CPU cores to run at 2.3GHz. It uses a new version of the core known as Krait 400, which will deliver up to 40% better performance than the Snapdragon S4 Pro. Qualcomm's architecture allows each of the cores to run at a variable frequency, unlike ARM's LITTLE plan, which uses the same speed. As a result, Qualcomm enables better performance than ARM Holdings.
Mobile traction has rewarded Qualcomm's shareholders with a 40% hike in quarterly dividends and a new $5 billion share buyback program. The company has declared a quarterly dividend of $0.35 per share, up from $0.25 previously. It will also have a 21.5% annualized raise in its dividends by 2014, and the new yield of 2.2% makes Qualcomm one of the most attractive dividend payers in the tech sector.
The Processed Conclusion
The Trio -- Intel, ARM Holdings, and Qualcomm -- offers strong growth potential in mobile chips and processors. These companies also have attractive dividend policies, which makes them strong bets for your portfolio. The rapid growth in smartphones will further help these companies to enjoy better futures in manufacturing or designing mobile chips and processors. I recommend buying these stocks for long-term growth.