Intel (NASDAQ:INTC) used the recent Consumer Electronics Show to unveil Medfield - its low power System on a Chip (SoC) for smartphones and tablets. While Intel uses its own graphic technology in desktop processors, a look at the chip design reveals that video and graphics are handled by the PowerVR 540, a product of Imagination Technologies (OTCPK:IGNMF).
The PowerVR series was already a serious contender in the smartphone/tablet sector - Apple (NASDAQ:AAPL) uses their IP in its mobile and devices and owns a sizable stake in Imagination Technologies. However, they faced competition from Nvidia's (NASDAQ:NVDA) Tegra and Qualcomm's (NASDAQ:QCOM) Adreno. What Medfield signals is that Intel is unlikely to scale down its own graphics technology to smartphones, and instead rely on licensing deals to supplement its processors. As a result of this, Imagination Technologies now faces considerable long term growth potential for 2 major reasons.
- Windows 8 will be the first to support ARM based processors. Since PowerVR is used by Intel in lower power x86 chips already, it has the best history of Windows driver support and DirectX compatibility. Previous iterations of the Atom processor used licensed PowerVR technology to provide graphics processing for netbooks. Companies looking to offer ARM based Windows machines and tablets will view the existing support base favorably.
- Unlike Nvidia and Qualcomm, which bundle Tegra and Adreno graphics processors with their SoCs and produce the silicon internally, Imagination Technology follows a licensing model. A substantial amount of the risk is associated with direct involvement in the manufacturing process - yield issues have often plagued hardware launches by Nvidia and AMD. A licensing model, while lower revenue than direct involvement in chip fabrication, also protects the business from downside variance. With major players like Intel and Apple engaged in long term licensing arrangements, and with their business insulated from the relatively high risk of direct chip production, they look to have good potential for stable revenue growth.
Because of these unique factors, Imagination Technologies may be in a position to become a de facto standard in low power devices over the next few years. A long position is worth considering.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.