Why This Mobile Chip Player Will Underperform

Nowadays, virtually every tech company needs some type of strategy to capitalize on the mobile revolution. For example, Advanced Micro Devices canned CEO Dirk Meyers partially due to his lack of enthusiasm for mobile.

Intel (Nasdaq: INTC  ) has been late to mobile, but it's making a push with a vengeance with its Medfield Atom processors. The mobile CPU space continues to be dominated by designs from ARM Holdings (Nasdaq: ARMH  ) , but there's another intellectual property licensor that's coming in from below: MIPS Technologies (Nasdaq: MIPS  ) .

Back to battle
MIPS isn't new to the scene, but mostly stays under the radar since it doesn't have big name semis rallying behind it in the same way that ARM does, whose camp includes heavyweights like NVIDIA, Qualcomm, and Apple, among others. MIPS has always held a strong position in set-top boxes, working with the likes of Broadcom and Sigma Designs.

The chip designer has demonstrated mobile gadgets with its SoCs in it over the past two years at the Consumer Electronics Show, and this year was no different. Its mobile processor partners are unfamiliar names like InGenic and Action Semiconductors. MIPS's strategy is currently to tap into the Chinese market with low-end offerings. Its devices offer dubious performance and build quality, considering the low price points.

MIPS and InGenic are launching a couple of models of a sub-$100 tablet running Google's (Nasdaq: GOOG  ) Android 4.0 Ice Cream Sandwich in China, there called the Novo7 and manufactured by Ainol. MIPS says a version destined for the United States is in the pipeline, but the current model is loaded with apps geared specifically for the Chinese market.

Smaller is better
The InGenic SoC inside the Novo7 is built in a 65-nanometer process, which is large compared to the Medfield's 32-nanometer and many ARM chips' 40-nanometer to 45-nanometer, and Intel and ARM chips are steadily approaching smaller geometries. The vast majority of ARM chips are fabbed by Taiwan Semiconductor Manufacturing (NYSE: TSM  ) , so its capabilities will be critical in facilitating ARM's technological advances.

TSMC's 28-nanometer process is still getting ramped up, currently only accounting for 2% of sales, while Intel is most capable of shrinking its processes fastest, thanks to its deep pockets and focus on vertical integration. Chipzilla is rolling out its PC-bound 22-nanometer Ivy Bridge chips early this year, likely using the same process for mobile chips in 2013.

Three's company
MIPS was punished pretty severely last year, losing 71% of its value, particularly cratering upon its fourth-quarter and full-year results. The company's first quarter was similarly gloomy, with total revenue shrinking by 24% and operating income getting destroyed by an astonishing 89%.

There may be a place for MIPS in mobile, but it doesn't look like it will be in the mainstream. It will likely need to remain relegated to low-end emerging market sectors, and any attempt to break into the competitive domestic market will only end up punishing MIPS's partners.

For the time being, ARM will continue to lead mobile processors, with Intel nipping at its heels as it opens its deep pockets and guns with Medfield. The low-end domestic Android tablet market is already occupied by Amazon's Kindle Fire and Barnes & Noble's Nook Tablet, both of which are powered by Texas Instruments' ARM-based OMAP. Google cares most about Android's proliferation, so the more, the merrier in its mind.

That's not to say a sub-$100 Android tablet wouldn't gather some sales, but that it would end up being a losing proposition for the maker of said tablet. MIPS powered a $130 Android 2.3 tablet, the Velocity Cruz, which was eventually discontinued, and I doubt its plug was pulled because they were making too much money.

With little going for it in terms of growth drivers as its fundamentals shrink , MIPS doesn't have a bright future, so I'm giving it an “underperform” CAPScall today. MIPS may land low-end design wins here and there, but there are far better places to invest in mobile processors.

The mobile revolution is set to become The Next Trillion-Dollar Revolution. There are lots of companies that are set to cash in on it, but one in particular has excellent prospects. The company is one of few players that will help power the mobile devices of the future, and it also has exposure to the explosive growth in China. I'm so bullish on the stock that I've given it an "outperform" CAPScall, and it even recently found a position in my personal portfolio. Get access to this 100% free report to find out what company I'm talking about.

Fool contributor Evan Niu has sold bullish put spreads on NVIDIA and QUALCOMM. He owns shares of ARM Holdings, Amazon.com, and Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Apple, Amazon.com, QUALCOMM, Texas Instruments, Intel, and Google. Motley Fool newsletter services have recommended buying shares of Intel, Google, NVIDIA, Apple, and Amazon.com. Motley Fool newsletter services have recommended writing puts in NVIDIA. Motley Fool newsletter services have recommended creating a bull call spread position in Intel. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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