ARM Partnership Is Set To Boost Intel Stock

It looks like Intel (NSDQ:INTC) has finally realized the potential of ARM (NSDQ:ARMH) business prospects. The chipzilla entered into a licensing agreement with ARM last week, which allows it to manufacture ARM-based mobile SoCs for fabless chipmakers such as Qualcomm, Apple and Nvidia. The move would combine Intel’s industry-leading chip fabrication processes with ARM’s highly efficient mobile designs, and the joint synergies could potentially shake up the entire semiconductor industry. Let’s take a closer look to have a better understanding of it all.

• Intel recently struck a licensing agreement with ARM to manufacture its chips.
• The Move could boost Intel's revenues significantly. 
• It could also bring upon a cash crunch on Intel's competitors, that could ultimately slow down their rate of progression.

Welcoming ARM, with arms wide open

 

Let me start by saying that Intel has had the world’s most advanced chip fabrication technologies for several years now. It’s manufacturing lead was as long as 18 months, back in 2014 and the chipzilla is expected to still stay ahead of its peers (Taiwan Semiconductor, GlobalFoundries and Samsung) at least up till 2018. Intel’s competitors were thriving till date due to increasing business from ARM, but now that Intel has entered the scene with similar intentions, the bulk of this business would pretty much go to the chipzilla due to its manufacturing lead. After all, in the cut throat semiconductor industry, everyone would want their performance chips to be manufactured on the latest nodes.

2015 Rank	2014 Rank	Vendor	2015 Revenue	2015 Market Share (%)	2014 Revenue	2015-2014 Growth (%)
1	1	TSMC1	26,566	54.3	25,175	5.5
2	3	Globalfoundries2	4,673	9.6	4,400	6.2
3	2	UMC3	4,561	9.3	4,621	-1.3
4	4	Samsung Electronics4	2,607	5.3	2,412	8.1
5	5	SMIC	2,229	4.6	1,970	13.1
6	6	Powerchip Technology5	985	2	917	7.4
7	7	TowerJazz	961	2	828	16.1
8	10	Fujitsu Semiconductor	845	1.7	653	29.4
9	8	Vanguard International	736	1.5	790	-6.9
10	9	Shanghai Huahong Grace Semiconductor	651	1.3	665	-2
		Top 10 for 2015	44,814	91.7	42,431	5.6
		Others	4,077	8.3	4,281	-7
		Total Market	48,891	100	46,812	4.4

 

 (Source: Gartner.com)

·         - The global semiconductor foundry business is estimated to be around $48.8 billion in size. If Intel manages to slice up even 10% of this market, which shouldn’t be that hard since it currently has the world’s most-advanced chip fabrication technologies, its incremental revenues could be to the tune of $4.8 billion. That’s a significant bump in its top-line, representing an increase of about 8.7% over its FY15 revenue. So its needless to say that Intel would be opening a big revenue stream with this move. Intel can later use this additional cash flow to fund its race to global 5G domination.

·        -  More to the point, the semiconductor industry requires billions of spending each year, earmarked towards improving manufacturing technologies. If Intel manages to take away a sizable market share from Taiwan Semiconductor and GlobalFoundries, then the their constrained cash flows could hamper their R&D and capex spending, and ultimately result in their growth slowdown. So the move to manufacture ARM chips not only serves as an incremental revenue driver for Intel, but also limits the growth of its foundry competitors. Talk about taking down two targets with one blow.

·         - Also, once Intel starts manufacturing ARM-based chips, its factory utilization rate and production volumes would increase. This should allow the chipmaker to attain better economies of scale, improve its manufacturing efficiency and at the end of the day, it would become easier for Intel to keep its fabs busy with the onset of this deal. Its foundry operations for ARM-based chipmakers would act as a hedge against the slowing down PC  sales. These benefits should translate into better gross margins.

·         - And lastly, the move allows Intel to capitalize on the mobile opportunity, while it still can. The chipzilla won’t have to design its own Atom chips for mobile devices anymore in order to tap the smartphone/tablet segment. So Intel would now be able to cater to the mobile market, without having to invest billions in contra revenue or mobile-related R&D spending. I believe that this is a low-risk, high-reward opportunity for Intel and its shareholders.

Tempering excitement

Just like any other business move, this one brings its own set of challenges and limitations as well.

·        -  First of all, Intel won’t be a chipmaker like Qualcomm, Apple or Nvidia. It will just be a foundry catering to other fabless firms. This pretty much means that Intel’s revenue would be limited to its production volume, regardless of how profitable or popular those chips become. So its revenue stream could end up being as volatile and seasonal as Micron’s.

·         - Secondly, if Intel continues in this direction, it might also end up opening its foundry business to ARM-based server chipmakers such as Cavium, AMD and Qualcomm. This may prove to be a death knell for Intel’s highly profitable x86 server business. It could fuel the growth of ARM servers and there’s a solid chance that they’d end up cannibalizing Intel’s Xeon sales. So Intel must not head in this direction.

·         - More to the point, Intel’s excess fabs aren’t running 10nm processes. Manufacturing 10nm chips on large scale volume by 2018 would require a lot of retooling on Intel’s part. This would most certainly bump up chipzilla’s capital expenditures over the next few years, without providing any sort of guarantee that fabless chipmakers would pick Intel for their manufacturing needs.

Putting it all together

Intel finally realized that other foundries are its competitors as well. If the chipzilla succeeds in taking business away from them, it would bring upon a cash crunch and ultimately slow down the rate of progress of competition. So the move not only stands to boost Intel’s revenues, but can also potentially impede the growth of its competition. I see this as an excellent business move forward for Intel and its shareholders.