Fellow Fool Anders Bylund and I have a lot of things in common. We both follow technology companies, have positions in OmniVision Technologies, enjoy fine dining, and appreciate leisurely romantic walks with our respective wives (as opposed to with each other's). However, we diverge when it comes to our stances on chip IP licensers ARM Holdings (Nasdaq: ARMH) and MIPS Technologies (Nasdaq: MIPS).
I think MIPS will underperform, while Anders leans the other way. I like ARM so much that I bought shares, while Anders justifiably thinks it's downright pricey. We've each made our respective CAPScalls; it's about time for a friendly Fool Duel.
You and what ARMy?
British chip designer ARM has accumulated nearly unstoppable momentum in mobile processor design wins, with more than 90% smartphone market share, thanks in part to gaining the support of some major players including Apple (Nasdaq: AAPL), NVIDIA, Qualcomm, and Texas Instruments, among others, that are the pick of the litter when it comes to powering iOS and Google (Nasdaq: GOOG) Android gadgets.
That momentum will help it jump off into new markets, with one of the most promising being Microsoft Windows 8. You can expect some heavy defense from Chip King Kong Intel (Nasdaq: INTC), but WinTel's monogamous days may be numbered as ARM's army advances. There will be a lot of software compatibility hurdles to clear, but this storyline is just beginning.
Windows NT 4.0, the last major consumer Windows release to support MIPS architecture, came out 16 years ago, although Microsoft's embedded device OS, Windows CE, still supports MIPS, x86, and ARM chips alike.
Lower the portcullis!
Digital TVs and set-top boxes (STB) have always been MIPS castles, thanks to partners like Broadcom and Sigma Designs. The overall STB market declined last year, according to iSuppli estimates, but is expected to resume growth this year. ARM estimates it carried a 40% share in Digital TVs and STBs last year, and pointed to the segment as one of its key growth areas over the next few years.
The next wave of Smart TVs will be running ARM chips, led by Apple and Google. Apple's current STB Apple TV uses an ARM-based A4 chip, and its impending full-size TV set should follow that lead. Marvell Technology's ARM-based Armada 1500 will also power the next generation of Google TVs, despite Marvell also being a MIPS licensee.
That's a pretty major assault on MIPS' core markets, with two of the biggest, baddest disrupters at ARM's back.
Will the real mobile threat please stand up?
Intel is a much more credible threat in the mobile space with its Medfield Atom chip, since it has the resources to wage war. Both Intel and MIPS will rely on Android for mobile, since iOS is all-ARM with virtually no chance of a switch. MIPS is trying to infiltrate the low-end Android market, an arena that happens to be Amazon Kindle Fire turf, which sports an ARM-based OMAP from TI.
Another major obstacle for MIPS in mobile will be getting its chips fabricated at smaller processes. The MIPS-based InGenic chips inside the sub-$100 Novo7 Android 4.0 tablets are built on 65-nanometer technology (which helps keep costs down), much larger than ARM-based rivals.
Apple's A5 uses 45-nanometer, NVIDIA Tegras use 40-nanometer, while Samsung's newest Exynos uses 32-nanometer. TI's and Qualcomm's newest additions to their respective OMAP and Snapdragon families this year will get down to 28-nanometer, and Intel's Medfield will be on 32-nanometer.
MIPS chips already lag in performance per watt, and making the trade-off to go smaller for the sake of improved power efficiency (and all-important battery life) will jack up costs, which doesn't play well with the low-end strategy.
A picture is worth 746 words (the length of this article)
There's no doubt that ARM is an expensive stock, but I think its leadership momentum, growing ecosystem, and web of large interested backers warrant the premium valuation. Look at how the pair's revenues have stacked up over the years.
Both companies recently reported quarterly results, with ARM delivering estimate-trouncing figures while MIPS is testing investors' patience. It's no wonder why ARM shares have been on a healthy uptrend over the past few years in lockstep with its top line, while MIPS shares have done anything but that.
There you have it, Anders. The trend is your friend, my friend.
Don't miss my Foolish opponent's arguments. What do you think? Is MIPS or ARM a better buy? Share your thoughts in the comments box below.
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