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 (INTC +1.14%), 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 (ARMH +0.00%). 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 (QCOM 1.01%), 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.
