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Better Buy: ARM Holdings plc vs. Intel Corporation

By Anders Bylund - Aug 29, 2016 at 9:23PM

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This really isn't a competition at all, since the British chip technologist is dropping out of the public markets altogether. Here's what you need to know.

Image source: Getty Images.

In many ways, Intel (INTC -0.86%) and ARM Holdings (ARMH) are natural rivals. ARM collects royalties on billions of mobile device sales, since its technologies are at the heart of nearly every smartphone and tablet. Intel chips power the big-iron systems inside every data center. Both sides have tried to make inroads into the other's core markets, but not with much success.

It's the type of epic rivalry that fuels impassioned investor inquests. Which business model is the better long-term investment, and which stock should you buy today?

However, these questions have boiled down to a very simple answer recently. You should sell your ARM Holdings holdings and invest in Intel. It's really that simple.

Game over, man. Game over!

You see, ARM is not really an option anymore. In mid-July, the company accepted a buyout offer from Japanese wireless network operator SoftBank (SFTBF 1.99%), which effectively took ARM shares off the market. Intel, on the other hand, remains a viable stand-alone business and a solid investment for the long term.

So there's the quick and easy answer -- sell whatever ARM shares you might own in order to collect your profits, and take another look at the very investable Intel stock instead.

More nuance, please

Okay, so there are still a few special situations to consider.

SoftBank doesn't own ARM quite yet. ARM shareholders must still approve of the merger, and the deal has to pass the usual battery of regulatory tests in the U.K. and Japan. If you expect any of these speed bumps to derail the merger process, you might want to sell ARM shares short. Anything less than a simple completion of this acquisition would undoubtedly crush ARM's share prices.

However, there's little reason to make that negative bet. SoftBank does not compete with ARM in any way, shape, or form. Adding a chip technology business to a mobile network operator should raise very few antitrust concerns, paving the way toward a smooth closing.

As for shareholder approval, ARM went out on a high note. The ARM buyout bid lifted ARM shares to a fresh all-time high, soaring more than 40% overnight. It's hard to ask for a better exit deal than this, and I'd be shocked if ARM shareholders gave the deal a thumbs-down.

So, ARM shares are dead in the water. The only reasonable bet to make here is a negative one, and even that option looks weak.

What about Intel?

Of course, Intel is a better option only if you believe that the chip giant will create value on its own. Otherwise, you might as well just park your cash in the nearly immovable ARM stock (or a simple savings account) while you watch Intel shares plunge.

As an Intel shareholder myself, I would disagree with that conclusion. The company has weathered some massive market storms in recent years, coming out even further ahead in the crucial data center market. Meanwhile, Intel shares are trading at very reasonable valuations such as 14.7 times trailing free cash flow and 15.4 times adjusted earnings.

There's no such thing as a guaranteed winner, but Intel's risk-reward balance is positive enough to keep its place in my own real-world portfolio.

If you'd still prefer to take ARM's side in this debate, you would have to consider the pros and cons of SoftBank's wireless business and global ambitions. That's a worthy line of investigation, but beyond the scope of this article. And if you don't want to pick sides at all, consider that Intel recently became an ARM partner with hopes of manufacturing ARM-based chips for other companies. From that point of view, an Intel investment is a bet on both of these tickers.

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Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
$41.65 (-0.86%) $0.36
ARM Holdings plc Stock Quote
ARM Holdings plc
SoftBank Group Corp. Stock Quote
SoftBank Group Corp.
$40.00 (1.99%) $0.78

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