Following Intel's (NASDAQ:INTC) fairly disastrous investor meeting, the market decreed that ARM Holdings (NASDAQ:ARMH) was in a much better position than it was prior to Intel's meeting. Interestingly enough, probably the biggest bear case for ARM is that Intel will take a meaningful amount of market share in the smartphone/tablet apps processor market and slow ARM's growth considerably. While this dynamic may or may not eventually play out, it is clear that Intel's announcements relieved some of this pressure as shares soared during and following Intel's presentations. Was this jump justified?
The big "win" for ARM at Intel's investor meeting seems to have been Intel's announcement that it would be willing to build chips for "anybody who can take advantage of Intel's leading edge process technology" (with the added disclaimer that said customers are willing to pay a premium for the technology). Naturally, the Street took this to mean that Intel would be willing to build chips for just about anybody (even a competitor), so this immediately "diffused" the threat that Intel posed to ARM – at least from what the price action seemed to suggest.
This doesn't really jive with the reality of the situation. For starters, Intel is aggressively gunning for the tablet market next year, with a target of 40 million units shipped. Given that industry analysts project that about 260 million tablets will be sold during calendar 2014, Intel is planning to capture 15% of the tablet market. Of course, this leaves 85% of the tablet market still set to bear royalties to ARM – still not bad, but share loss is share loss!
Could it be smartphones?
Intel also announced an aggressive high-end smartphone roadmap. Interestingly enough, the lower-end – but higher-volume – roadmap doesn't really start to look competitive until the second half of 2014/first half of 2015 when the company introduces its first highly integrated parts. From there, Intel will be competing on phones in a top-to-bottom fashion and then the ARM short case starts to look more compelling (investors like to see real progress). So, could the enthusiasm around ARM's share price be due to what was presented about Intel's smartphone roadmap? Possibly, but it does look compelling enough to snatch some high-end sockets from the ARM camp.
Foolish bottom line
Realistically, ARM is probably going to be incredibly volatile over the next year as Intel begins to take share in tablets and phones. Any major socket losses in, say, a Nexus or a Galaxy device could serve as a material headwind to ARM's rich valuation. However, on the flip side of the coin, ARM is likely to begin to show meaningful progress in the networking infrastructure space as the industry begins to move from IBM POWER based chips as well as MIPS based products.
On top of that, it's tough to ignore that ARM continues to expand its content share in mobile devices as it more aggressively expands into supplying graphics and physical IP. Going a step further, it's clear that ARM is well positioned from an embedded standpoint with its Cortex M/R IP, ready to pounce on any and all opportunities in the "Internet of things". While smartphones have been the "big" story over the last five years, ARM's future growth is dependent on a much more diversified set of end markets.
With that said, it's just interesting that ARM's share price popped on the Intel meeting – while ARM may or may not be undervalued, nothing said at Intel's investor meeting is likely to translate into anything meaningfully positive for ARM as far as the top and bottom lines are concerned.