When Apple (AAPL 1.27%) released its iPhone 5s and 5c models, it reached a new record in sales. It was encouraging for the stock, considering a little over half of the company's overall revenue is generated by iPhone sales. Besides solid sales numbers, a new iPhone feature was revealed.
Rise of the 64-bit chip
The iPhone 5s became the first smartphone ever to implement a 64-bit ARM chip. The chip, called the A7, was custom-designed by Apple, and initially stirred up some controversy.
Anand Chandrasekher, a senior vice president with Qualcomm (QCOM 1.41%), said, "I know there's a lot of noise because Apple did [64-bit] on their A7. I think they are doing a marketing gimmick. There's zero benefit a consumer gets from that." Qualcomm quickly backtracked, however, issuing a statement saying that, "The comments made by Anand Chandrasekher, Qualcomm CMO, about 64-bit computing were inaccurate."
Whether Qualcomm likes it or not, 64-bit is coming to mobile devices, and Apple just set the standard. Qualcomm seems to know it, as indicated in the latter part of its statement when it said, "The mobile hardware and software ecosystem is already moving in the direction of 64-bit; and, the evolution to 64-bit brings desktop class capabilities and user experiences to mobile, as well as enabling mobile processors and software to run new classes of computing devices."
Competition is already developing
One of Qualcomm's competitive threats, NVIDIA (NVDA -3.33%), is already working on a 64-bit chip that will power Android-based mobile devices by 2014. NVIDIA, like both Apple and Qualcomm, designs its own CPU cores based on Arm instruction sets. The ARMv8 set is what Apple used for its A7 chip and the set that NVIDIA is currently using to work on its own 64-bit chip. Qualcomm will eventually need to catch up, but hasn't announced any plans for a custom-designed 64-bit chip yet.
As of now, Qualcomm's Snapdragon processors dominate the high-end smartphone and tablet markets. NVIDIA is not even close to Qualcomm in market share. Jumping out front to compete with Apple in the 64-bit race may give NVIDIA a lead in the long-term, however. According to Extremetech.com, it's believed that NVIDIA started work on ARMv8 between late 2010 or early 2011.
An investment in custom ARM processors can also be risky, so maybe Qualcomm is holding out for a reason. According to Patrick Moorhead of Forbes, ARM architecture licenses are expensive, costing hundreds of millions of dollars for R&D to produce. If 64-bit does take off, however, Qualcomm may be left behind without its own custom core. Qualcomm's market cap of $116 billion dwarfs NVIDIA's $9 billion, but both companies currently trade at at around 17 times earnings and both pay dividends yielding around 2%.
Why 64-bit is important for the future
Apple introducing the A7 was a clear game-changer, if Qualcomm's jumpy immediate reactions and NVIDIA's aggressive pursuits into 64-bit are any indication. JK Shin, Samsung's mobile business head, also stated that the company's next smartphones will feature a 64-bit CPU. Apple has gained the first-movers advantage, but why is 64-bit really important for the future? Jefferies analyst, Peter Misek, pointed out "that longer term it is a game changer as apps are rewritten and cross platform capabilities become utilized."
Mark Shuttleworth, founder of the UK-based software company Canonical, also sees Apple's move into 64-bit as a strategic long-term move. Shuttleworth thinks that Apple wants to merge the iPhone with the Mac, stating: "People are saying yes, mobile processors are catching up with the desktop. When Apple announced the iPhone 5s, it called the processor "desktop-class," and I don't think that was an accident -- it was sending what we think is a very clear signal that it will converge the iPhone and the MacBook Air."
The bottom line
At the time of the iPhone 5s and A7 processor launch, Apple threw around the term "desktop class," and as Mark Shuttleworth pointed out, there is likely a reason for this. There is huge potential for the future if Apple utilizes its new chips to further integrate its ecosystem. There's a good chance that an A7 chip will be integrated into the next line of iPads, and the company's Mac PCs already run on a 64-bit OS.
If the company can create a unified, converged operating system that can flawlessly transition between smartphone, tablet, and PC all with one OS, it will have a real game-changer. Shares of Apple currently trade cheap at around 12 times earnings and also yield 2.5%. Now looks like a good time to establish a position after seeing strong iPhone sales and brightening future prospects.
