In 2006, Intel (INTC) threw in the towel on its NetBurst family of processors. Fraught with energy consumption and heat problems, the ill-fated microarchitecture opened the door to renewed competition from rival Advanced Micro Devices (AMD). To quell this threat, Intel created the tick-tock model, which coalesced into a full-scale microchip war. The breakneck pace of die shrinks and new microarchitecture releases bled Advanced Micro dry.
According to the latest IDC report, Intel controlled 80.1% of global processors sales in 2011, Advanced Micro earned 19.7% of the total, and the Taiwanese firm VIA Technologies was responsible for just 0.4% of sales. Intel made gains in the desktop and workstation segments, but Advanced Micro gained ground in laptops. Overall, Intel lost 0.6% of world market share to Advanced Micro's 0.7% gain.
Advanced Micro made small gains last year, but I doubt the Sunnyvale firm is popping any champagne bottles. It posted small profits in 2011, but has yet to overcome the $6 billion in net losses it incurred during 2007 and 2008 alone. The company announced layoffs in November, which cut 10% its workforce. Advanced Micro released the Fusion line of processors in late 2011, targeted at netbooks, whose growth potential was largely superseded by the introduction of tablet computers in 2009. Consumers are clamoring for Intel's new Ivy Bridge family while Advanced Micro's new Trinity release is largely ignored. Intel, as it turns out, is probably more worried about competition from a British firm than its classic rival.
That new challenger is ARM Holdings (ARMH), based in Cambridge, UK. ARM Holdings announced last year that it intends to carve out a large slice of PC market by 2015. The company controls 95% of the smartphone and embedded device markets, but has no presence in the PC business. Instead of manufacturing chips, it designs them and sells production licenses to firms such as Samsung, Texas Instruments (TXN), and even Intel. In doing so, ARM Holdings dramatically cuts its costs and entry barriers.
Intel is fighting back, forming new alliances with Motorola Mobility (MMI) and Lenovo to strike at ARM Holdings' smartphone and tablet dominance. The three companies look forward to releasing an Intel Atom-powered smartphone, codenamed K800, and a 10-inch tablet designed by Lenovo, also powered by the Atom. The three companies declared the partnership to be a "multiyear, multidevice" collaboration.
What's the Takeaway?
Intel may finally face a true test to its monolithic business model. ARM Holdings is a small, flexible firm with potent partners. An agreement with Microsoft (MSFT) will bring Windows 8 compatibility to ARM Holdings' architecture. The latest operating system will find widespread adoption in smartphones and tablets. By contrast, strong sales of Windows 7 will likely limit Windows 8's penetration into the PC market. The next generation of Windows-based smartphones and tablets promises to be a windfall for ARM Holdings, while PC sales will likely remain flat.
On the flip side, ARM Holdings has just $45 million in cash yet intends to take down Intel, a firm that repeatedly outspends the competition to stay on top. Earlier this year, CEO Warren East stated that ARM Holdings is targeting 40% of the mobile PC market by 2014, a lofty goal to say the least. Yes, Warren East is predicting his company will double Advanced Micro's current market share in just three years. Excuse me if I sound skeptical, but tech companies have a tendency of promising more than they can deliver. Intel is prepared to outspend and undercut ARM Holdings at every turn, just like it did with Advanced Micro. Furthermore, Intel controls the PC market with its ubiquitous x86 architecture and widely deployed interfaces such as USB, SATA, and PCI-Express.
Intel trades for $28 per share with a trailing price-to-earnings ratio of 11.70 and forward price-to-earnings ratio of 10.60. The company pays a $0.21 quarterly dividend on earnings of $2.39 per share and its yield is 3%. Intel has managed to double its dividend every three years since it 1992.
Advanced Micro trades at a little less than $8 with a trailing price-to-earnings ratio of 11.50 and forward price-to-earnings ratio of 9.30. It earns $0.67 per share and does not pay a dividend.
ARM Holdings trades at the $28 price level as well, but on a trailing price-to-earnings ratio of 71.10 and forward price-to-earnings ratio of 31.90. It earns $.39 per share and pays a semiannual dividend of $0.085, yielding just 0.60%.
ARM Holdings is priced as though it already controls a third of the processor market. In fact, if ARM Holdings was valued at a similar price-to-earnings ratio as Intel, the stock would fall under $5. The sky-high valuations lead me to believe ARM Holdings has a huge downside built in, even if it somehow reaches its goal of 40% of the market in just here years. Skip buying ARM Holdings; you'll have plenty of time to purchase it later if the company is the real deal. Buy Intel and pocket the juicy dividend -- your portfolio will thank you later.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.