I'd Still Take ARM Holdings, By A Nose

| About: ARM Holdings, (ARMH)

Imagine you are this company:

  • You own about 90% of two markets (smartphones and tablets) that look like they are up-up and away as far as the eye can see (see Figure 1)
  • You are what mortal enemies (Android and iPhone) have in common (at least for now)
  • .. and at $12B and change, you have a market cap of less than the quarterly profit of Apple (NASDAQ:AAPL). They could eat you with nary a burp.

So if the situation is this perfect, why write any further? Just back up the truck and arm yourself with ARM (NASDAQ:ARMH)?

Figure 1. Tablets & Phones: Rising Tide as far as the eye can see (Source. Linley Group)

Intel's (NASDAQ:INTC) why. After years of wandering the desert (denial, lack of acknowledgement about the importance of low power, whatever), Intel finally has a dog in the fight. Intel is using the billions it spends on proprietary processing technology to wage a 'die shrink' war.

What it lacks in low power system on chip design expertise, it makes up for in being able to make smaller chips that those who rely on foundries such as Taiwan Semiconductor (NYSE:TSM) and United Microelectronics Corporation (NYSE:UMC). And that gets you to a splashy CES announcement and a benchmark, which if numbers are to be believed gets them to the ARM ballpark (Figure 2), and some nervous comments from the ARM CEO.

Figure 2. Medfield vs. ARM 9 (Samsung Galaxy)

Is ARM the new AMD, an upstart, then a threat, only to be crushed by a foe with deeper pockets and a bigger gun? I don't think so, and here's why I think ARM will prevail:

  • Intel matches the 'old' ARM 9, and ARM hasn't made its statement with the ARM 15 quite yet. In the long run, it is easier for ARM to close the process gap than for Intel to learn to lower power architectures. Company cultures are hard if not impossible to change, and the high-speed, high-power chip guys who made VP over the last two decades ain't turning back on what made them successful.
  • I fully expect Intel to ink some deals with Medfield, but don't underestimate the power of the incumbency - an army of engineers in Austin who are already familiar with programming ARM cores into customized ARM based solutions.
  • If you look at the numbers in Figure 3 below (David is Sir David Brown, CEO of ARM by the way), you might think it would be a sign of cranial sickness .. but remember this, Intel vs. ARM isn't Intel vs. ARM. It is Intel vs. (Samsung (OTC:SSNLF) and Nvidia (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM) and...). ARM builders like Nvidia get to not only create proprietary solutions using ARM technology, but also keep 98% of the profit.
  • Oh, and did I mention that the only other use of Intel's x86 architectures, AMD, has now moved to the ARM side?

Figure 3. ARM vs. Intel: the Shrimp and the Whale

I could also tell you about Intel's incursion into the server market with AMCC (NASDAQ:AMCC), and its investment in a Japanese company involved in the 'Internet of Things', but I'll stop right here. The long term bet is simple - can Intel double its current $136B market cap executing on Medfield while its PC market evaporates, or is it more likely that ARM can double its $12B market cap with its position in tablets, and possibilities in both servers and the Internet of Things?

I think you know my answer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.