You Could Be Missing Some Huge Profits

If your portfolio stops at Google, Apple, and Samsung, you could be missing out on some big profits in tech.

What about the companies that supply the microchips that power devices? These chip companies stand to profit no matter who owns the dominant share in the tablet or smartphone markets. Forget the Apple versus Google debate – these firms supply to both!

Which chip companies have the brightest future? Let's take a look.

A decade of dominance

When most of us think computer chips, we immediately think of Intel (NASDAQ: INTC  ) , the world's largest chip maker by revenue. Intel's revenue totaled $53.3 billion in 2012, down slightly from $54 billion the year before. Intel designs and builds the chips that power more than 85% of PCs on the market. Intel's dominance in the PC industry hasn't been challenged in recent years – Intel's market share is almost unchanged since 2002, when the firm had 86.8% of the market.

However, the problem for Intel is that the PC market is eroding as consumers shift to tablets and smartphones. In the fourth quarter of 2012, PC shipments dropped an alarming 6.4%, rounding out a 3.2% drop on the year. Then, in quarters one and two of 2013, PC shipments plummeted further by 13.9% and 10.9% respectively. 

Still, the worst part for Intel is that the future looks even more bleak. Research firm IDC predicts that shipments of tablets will surpass desktop PCs later this year, and will eclipse portable PCs in 2014. Moreover, IDC predicts that desktop PCs and portable PCs will lose 6.4% and 5.8% of market share respectively in the connected device market by 2017. In contrast, IDC predicts that tablets will gain 5.3% in market share over the same period. Note the down-trending growth projection of the PC market and the uptick for tablets and smartphones. 

Source: techcrunch.com

The shift to tablets and smartphones is a problem because Intel is late to the party. Another firm is already in control.

A long ARM

One of the most dominant companies on the evolving microprocessing market is British firm ARM Holdings (NASDAQ: ARMH  ) . According to Forbes, ARM controls almost 90% of the smartphone and tablet application processors market. That means that almost every smartphone and tablet on the market runs on ARM technology.

What Intel is to the PC market, ARM is to the mobile market. The only difference is that ARM doesn't actually make the chips. ARM makes its living by developing and licensing its technology to manufacturing companies like Qualcomm (NASDAQ: QCOM  ) , who want to save on development costs. ARM then collects royalties and works on engineering the blueprints for the next wonder-chip. You could say that ARM is the brains of the whole operation.

ARM is smaller than Intel, and its revenues were just $708 million in 2012. But ARM was able to turn 23% of its revenues into profit compared to Intel's 20%. And although Intel is trying to penetrate the mobile market (Intel's chips will be in the new Samsung Galaxy Tab 3 tablet), ARM is too established for Intel to be a serious threat.

ARM's reach is great, and the company figures to have the dominant share in a rapidly expanding market for years to come.

Don't forget Qualcomm

Qualcomm is a firm that both develops and manufactures microprocessors, with an emphasis on manufacturing. Qualcomm manufactures over 50% of the ARM chips that go into smartphones and tablets, giving the firm a dominant position in the market.

Another plus for Qualcomm is its share of the new LTE network (the framework for 4G). Qualcomm owns an 86% market share in LTE smartphone modems, which means that Qualcomm will benefit greatly as 4G rapidly expands around the world.

In addition, Qualcomm is looking to make strides in the world's largest market: China. Qualcomm recently developed a chip that is compatible with China Mobile's technology, giving Qualcomm major upside when it comes to international growth. Currently, only 29% of the Chinese market has smartphones, so Qualcomm has plenty of room to grow.

Bottom line

Of the three, I would go long with ARM. Tablet and smartphone sales are headed up, and ARM has that market firmly in its grasp. I think that Intel will eventually gain a bit of mobile market share from ARM, but let's be honest, Intel's core PC industry is crumbling. Intel's stock price will eventually reflect this reality.

I think Qualcomm is a better investment than Intel, but Qualcomm is somewhat dependent on ARM for much of its technology. With that in mind I would still go long with ARM over Qualcomm.

Don't let your portfolio stop at Google or Apple. Dig deeper, see what's inside. 

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2013, at 3:07 PM, fearandgreed2005 wrote:

    What you have totally ignored is that INTC now has a huge lead in chip technology. You don't even mention TMSC. QCOM is partnered with TMSC to do manufacturing. They are presently at the 28nm node and are struggling to get to the 22nm node. They still don't have it. INTC is shipping 22nm and will start shipping 14nm in Q1 2014. INTC is now making the most powerful tablet chips that use the least power. They are soon to hit the market. In 2014 INTC will ship the most powerful phone chips that use the least power. Look for them in mid 2014. Investing is a game of the future. You are betting on the winners of the previous race.

  • Report this Comment On August 23, 2013, at 4:48 PM, marshgerda wrote:

    Articles like this really bother me. How can you say you would rather own ARMH over INTC going forward without any discussion about valuation? ARMH trades at 32x next years projected earnings. Shouldn't that matter when deciding whether to buy INTC or ARMH?

    Then fearandgreed is spot on in pointing out whether ARMH can maintain the market share advantage they have. INTC is a very smart company highly focused on R&D and mobile chips are right in their crosshairs. Given some of the new chips they have coming out, ARMH is at risk of losing more than slight market share and there is also risk of a price war, which did not work out well for AMD.

  • Report this Comment On August 23, 2013, at 5:24 PM, dezeit wrote:

    Your numbers show Desktop PC and Portable PC numbers together actually grows 9%. While that may be aggressive it would mean Intel's core market will stabilize. The biggest problem with your analysis is to fear monger using market share of the whole smart device market, to compare PC shipments. With smartphones/tablets growing quickly it will always dilute a flat PC share.

    While I agree Intel will not be competitive in smartphones for quite some time (due to lack of LTE integration), the new Intel chipsets should give it reasonable share of the tablet market, that market you are showing at 174% growth. That's upside for Intel. The ability for manufacturers to deliver Android and Win on a common platform is quite compelling. Added to that they want to adopt a 2 vendor strategy for chipsets to gain optimal pricing. Other issues you neglect are Dividends, Foundry challenges with small topologies and many other factors.

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