Apple's (NASDAQ:AAPL) stock may have declined after the company announced its iPhone 5s and its not-so-cheap iPhone 5c. But, on the same news, shares of ARM Holdings (NASDAQ:ARMH) immediately jumped 8%, with a total gain of 14% over the last five days, as investors anticipated hopeful news from Apple. What's the story?
Follow the leader
Earlier this month, Evercore Partners' Patrick Wang insisted that ARM was undervalued. His argument was based on the rumor mill's claim that Apple would be adopting the 64-bit microprocessor in its new iPhone. Though the processor is ultimately Apple's, it licenses technology from ARM.
As it turns out, Apple did launch a 64-bit microprocessor: the A7. Beyond the direct benefit ARM receives from Apple's royalties, this also makes a stronger case for Android system-on-a-chip developers, like Samsung and Qualcomm, to embrace the 64-bit chip, too. Apple's move into the space, therefore, could inspire a fast chain reaction among competitors and amplify ARM's benefits -- hence, the surge in the stock price.
In the details
This is great news for ARM shareholders for more than one reason. Though Apple already licenses technology from the microprocessor designer, the 64-bit instruction set merits higher royalty rates of 2% versus the 32-bit architecture licenses of just 1.5%, according to Raymond James' Hans Mosesmann. That's a sweet 33% jump in royalty revenue per chip.
Even more, there's little doubt that the A7 will go into other future Apple products, including iPads and, possibly, an iPod touch.
How long will Apple's edge last?
ARM's story highlights the intensifying competition among Apple and its competitors. Apple's willingness to pay ARM higher royalties echoes the intensifying race to stay ahead. Even more, ARM's surge in its stock price after the 64-bit processor was announced means that investors acknowledge that competitors will likely quickly adopt the technology, too.
Indeed, just hours after Apple's event, Samsung confirmed that its next generation of smartphones will feature 64-bit processors. However, Samsung may not benefit as much until Google updates Android with 64-bit support. Apple has already reengineered iOS 7 for 64-bit processing, which includes its first-party apps, but the next step will be for third-party developers to update their apps. The journey to 64-bit will be long and arduous; Apple is just the first to take a meaningful step.
Is Apple's willingness to adopt ARM's technology, despite higher royalties, another sign of intensifying competition in the smartphone market?
Fool contributor Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. 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.