Apple Inc. (NASDAQ: AAPL) has been a huge trend in computing and it has made and broken component makers as a result. While it was initially reliant upon Intel Corporation (NASDAQ: INTC) for its processors, Apple has been selling Mac units with its own processors for some time. There has been speculation for some time that Apple ultimately wants to have all of its computing devices running on its own chips. Recent developments are bringing this argument closer and closer to home and investors have to make some considerations here regardless of how this ultimately plays out.
Sterne Agee’s Shaw Wu offered insight on rumors that Apple will be using ARM-based chips from ARM Holdings PLC (NASDAQ: ARMH) for it products. That would in effect be a total replacement of Intel Corporation (NASDAQ: INTC). We said he believes it is inevitable that Mac + OS X and iPhone + iPad + iOS will all merge at some point, but the caution in taking this stance is that he does not believe that an ARM-Intel swap is likely to happen for a few years. He said, “It will likely take some time to optimize OS X and hence Mac for ARM. In addition, INTC processors are much more powerful for running compute-intensive Mac applications and for development.”
There is another issue to consider here. Advanced Micro Devices Inc. (NYSE: AMD) is for all practical purposes trading as though it is a going concern. Intel has just proven to be too fierce of a competitor and the Fab-Lite manufacturing model places AMD in a spot that Intel can adapt to changes faster. One new development is that AMD is now getting into ARM-based processors for servers. It is almost impossible to belive that something might work well for AMD, but this server business could represent the Hail Mary pass for AMD and the stock is barely above multi-year lows around $2.00.
In support of the AMD-ARM issue, it was just last week that Stern Agee’s Vijay Rakesh said, “Server-DataCenter accounts for ~20% of revenues and 32% of operating profit for Intel. Heretofore, most ARM competition has been 32-bit from non-PC OEMs–a non-issue, but 2H13-2014 could see server pricing/share competition as AMD introduces 64-bit x86-ARM hybrid server platforms with interest from DELL-FB-AMZN. While AMD-ARM partnership is not unexpected, ARM server entry is earlier than expected.”
As a reminder, NVIDIA Corporation (NASDAQ: NVDA) is still worth $8 billion and it wants to move from a graphics chip play into leading in graphics and also getting into tablets and ultrabooks.
Recent news was also out that Intel has made more progress into flash drives as this area is only going to grow larger. This is along the lines of Intel recapturing the processor market that has gone away from it as smartphones currently are not running on Intel processors.
At this time, Intel Corporation (NASDAQ: INTC) is only about 2.5% above a 52-week low as the stock is at $21.72 and the 52-week low is $21.22. And for ARM Holdings plc (NASDAQ: ARMH), its shares are at $34.05 and its 52-week range is $21.64 to $34.75. ARM now has a market cap of over $15.5 billion but it also trades at about 50-times this year’s expected earnings.
The market is extremely down on Intel (and on AMD, obviously). ARM is in favor but now it is going to have to deliver all over again on continued double-digit sales and earnings gains. If not, we all know what happens to high-flyers and high-beta stocks when their growth fails to meet expectations.
JON C. OGG