The Case For ARM Over Intel

Jan. 3.14 | About: ARM Holdings, (ARMH)

Another year has been ushered in. Another year that Intel (NASDAQ:INTC) and its bulls tell us, this year is different. If good intentions on being more aggressive in mobile or emphasizing tablets were the tonic to earnings woes - Intel would be able to right the ship. The problem is, as Horace Dediu captured some time ago in Who Killed the Intel Processor - Intel is trapped in the wrong business model. If you had to bet on the processor space, here are a few reasons you want to bet on ARM (NASDAQ:ARMH) and its tailwinds over Intel and its headwinds.

Device Tailwinds. Any near-term concerns over ARM's IP model has been allayed by the recent announcement around Apple's win of the China Mobile deal. With 750 million subscribers, China Mobile has more than 2x as many subscribers as the total population of the US. Given Apple's commitment to ARM chips, this is great news for ARM, and reflected somewhat in a healthy stock.

IP Based Business Model continues unabated. ARM's IP earnings stream 'formula' is notoriously complicated and a closely held secret. But to the extent that people have been able to reverse engineer it, all indications are that it is going to do remarkably well in both quantity and quality of earnings (see below).

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Custom Servers in Data Center. Ever since Applied Micro Circuits (NASDAQ:AMCC) talked up X-Gene, the ability for someone to crack Intel's stronghold in the Data Center has been a topic of controversy. What has become apparent over the last two years since I wrote about X-Gene, is that the move away from one-size-fits-all to custom hardware in the data center (e.g. Facebook's Group Hug), is long and strong. Intel all but admitted this in trying to work with Facebook on building custom chips. Guess what - Facebook seems to have picked ARM, a market indicator that Intel's attempts to change its stripes from a classic one-size-fits-all company to custom hardware, isn't convincing the people who need convincing. Add Google's selection of ARM to this body of evidence, and Intel has a fight on its hands.

Custom Hardware for Internet of Things. Nest (and to a lesser extent Google Goggles) has moved the Internet of Things market from dream to reality. This market demand hardware customized to the appliance or sensors physical operating environment. This further plays to ARM's strengths in customization. ARM has been aggressive in this space, and their ideas around chips that operate in a low and slow power environment represent a competitive advantage.

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If all this doesn't convince you, may be the chart above will. Since I wrote the SA article ARM By a Nose on February 9, 2012 - ARM has appreciated more than 100%, and Intel roughly 0. To the extent that investing is about making money (not religious arguments with arcane technology architecture diagrams), the choice seems clear.

Disclosure: I am long 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.