Wolf's Pick of the Week for March 29, 2016 - ARM Holdings (ARMH)

This week we're going to look at the technology that's at the heart of every little gadget you own - the CPU, or microprocessor.

Microprocessors are a commodity device - we know that they are in our computers, phones, tablets, and smart watches - but they are also omnipresent in our cars, controlling and monitoring our engines, brakes, and entertainment systems.  Modern appliances (washers, dryers, microwaves, dishwashers, ovens, even toasters) have them.  Many children's toys have them.  The Maker community has been taken by storm in the past few years by the release of embedded controllers (really just small CPU boards) such as the Arduino and the Raspberry Pi, which allow hobbyists to build sophisticated electronics devices of all sorts.

So if CPU's are a commodity - meaning that the market is well developed and not emerging - can we still make money by investing in them?

Cellphonus Rex

The answer is "yes."  For one thing, The Internet of Things is just around the corner, and we're soon going to see microprocessors deployed in everything.  For another, we have emerging markets in many countries including Brazil, South Korea, and China, where more and more consumers are gaining access (both physically and financially) to luxury items like consumer electronics.  Lastly, witness our culture of obsolescence - we're all trained from an early age to want the latest, greatest device.  Cell phone two years old?  You're a dinosaur, man, trade it in!  Tablet or computer too slow, screen too small?  Trade it in!  The turnover rate in consumer electronics alone will ensure that CPU manufacturers will be very, very busy for a long time to come.

There are many CPU manufacturers.  Some you've heard of:

Intel (INTC)
AMD (AMD)
Motorola (MSI)
Texas Instruments (TXN)
IBM (IBM)

Others you may have heard of, but weren't aware that they make CPUs:

Qualcomm (QCOM)
Broadcomm (AVGO)
Samsung
Apple (AAPL)

Others you may simply not even know exist:

ARM Holdings (ARMH), which was mentioned in my previous article on the Internet of Things
NXP/Freescale Semiconductor (NXPI)

There are more, but the big players are all mentioned above.  So which of these are the most interesting in terms of future growth potential?  One of the ones you've probably never heard of - ARM Holdings (ARMH).

To be fair, ARM Holdings doesn't actually manufacture CPUs - they design them, then license those designs to other companies.  Other companies like Apple, AMD, Broadcom, Samsung, Qualcomm, Texas Instruments, NVIDIA, Toshiba, Panasonic, and Fujitsu - in fact for their three product lines (the Cortex-A for high end processing, Cortex-R for embedded realtime applications, and Cortex-M for mobile applications) they have licensed their CPU designs to well over 250 different manufacturers.

Acorn Computer.  From old-computers.com

Why is ARM so successful?  They started in the 1980's as Acorn Computers, manufacturing their own coprocessors to supplement the then wildly popular MOS 6502 chip (which was used as the CPU in practically every "home computer" of that era).  While moderately successful, especially in the UK, they quickly realized that a new type of architecture was required to truly improve computer performance.  Inspired by the Berkeley RISC project white papers, they developed a true RISC (reduced instruction set chip) processor in 1985.  RISC processor use a simpler core instruction set, relying on the software and operating system to supply the complexity, which makes them more flexible and adaptable - especially when it comes to running multiple operating systems.  In the earlier days, RISC chips were also just plain faster - and consumed less power - than the CISC (complex instruction set chips) that Intel and everyone else was cranking out.

To this day the advantages of the RISC architecture hold true - as witnessed by the fact that they are able to license these chips to so many manufacturers, which use them for every conceivable application.

Licensees of ARM technology are free to improve on those designs - something Apple tends to do with every new generation of chip they put in the iPhone, iPad, and Watch.  But at core, those chips are still based on ARM technology, which means that ARM can sit back and rake in a tidy profit and sip sherry while designing the next generation of chip.  They incur none of the cost or risk in manufacturing - kind of an ideal situation if you like designing CPUs.

ARM chips are in almost every smart phone and tablet on the market.  In 2013 alone 10 billion ARM processors had been produced, and 60% of all mobile devices had at least one ARM processor.  Hard to say that ARM isn't winning!  So this is one case where you could invest in the manufacturer (Samsung, Apple, Qualcomm, etc.) and probably make money - or invest in their supplier (ARM) and definitely make money as we move into the larger Internet of Things and bring all of these technology to the newly emerging markets of Brazil, Russia, China, South Korea, etc.

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Disclaimer - I am not a financial expert and I am not responsible for any losses - or gains - you may make if you make decisions based on the information posted here.  If you do make money, please feel free to let me know!

Disclosure - Wolfgang Rumpf owns shares in Apple (AAPL) and Qualcomm (QCOM) mentioned above, and plans to purchase shares in Intel (INTC), Texas Instruments (TXN) and ARM Holdings (ARMH) within the next 12 months.