ARM And Linux Aim At Intel In The Data Center

| About: ARM Holdings, (ARMH)

At the end of September, after years writing about how ARM Holdings (NASDAQ:ARMH) was beating Intel (NASDAQ:INTC), I decided to run an experiment.

I sold some Intel shares, which I'd had since the 1990s, and bought 100 ARMHs.

Since then ARMH is up about 20%, while INTC is down 1%. It's true INTC carries a fatter dividend, which gets me even on the period once that comes in later this month, but for now I'd have to say that my intuition about these stocks was right and I'm profiting from it.

The news today is that ARMH is now attacking Intel's biggest beachhead, the data center. Its servers will run a version of Linux called Linaro, which is now getting some major support from such vendors as Red Hat (NYSE:RHT), Hewlett-Packard (NYSE:HPQ) and Facebook (NASDAQ:FB).

The last is especially important because, unlike the first two, Facebook buys servers, it doesn't sell them. While a server can always be virtualized, and these days it usually is, the initial operating system of the chip is still important to server buyers. Linaro code was released late last month.

As in clients, the motivation for using ARM is power. ARM designs lead in the low-power area, power costs are important in server rooms, and Intel is going to be in more trouble going forward than it is today.

ARM does not make nearly as much, on the top or bottom, as Intel, and never will. ARM is a chip design house. The company still has barely $500 million in sales/year. But lacking its own production companies it can bring one dollar in every five down to the bottom line.

Intel is literally 100 times bigger on the revenue line, running at $50 billion/year, and has similar margins. But it needs to invest heavily to gain those profits in a Moore's Law world -- production costs rise with chip complexity -- and it's actually carrying debt these days.

I may just double-down on my ARMH bet.

Disclosure: I am long ARMH, 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.