Markets

3 Ways ARM Holdings PLC Is Growing Its Mobile Opportunity

Investors familiar with the semiconductor industry know that ARM Holdings designs key intellectual property such as processor and graphics cores that are at the heart of many of the mobile devices in the market today.

The company doesn't actually make chips based on these designs, though. Instead, the company licenses the intellectual property to chipmakers who then incorporate ARM's designs into full chip designs. ARM usually collects an upfront licensing fee and subsequent royalty payments for each chip sold.

The royalty amount is usually dependent on how "rich" the ARM content inside of a particular licensee's chip is. A chip that uses two low-end ARM cores and no ARM-designed graphics processor is probably going to command a lower royalty rate than a chip with eight ARM cores in big.LITTLE as well as a huge ARM designed graphics processor.

In this article, I'd like to go over three ways that ARM is expanding its royalty opportunity in the mobile market.

Continued proliferation of ARMv8

It has been well-known for a while that processors implementing ARM's latest ARMv8 architecture -- that is, ARM's 64-bit instruction set which first made its debut in the consumer market with the Apple A7 chip -- command higher royalties than chips based on the older ARMv7 architecture.

A not-so-insignificant part of the ARM bull case over the last couple of years has been the royalty rate boost that ARM would see as the smartphone market transitioned away from ARMv7 toward ARMv8. Although analysts with Northland Securities recently described this shift from ARMv7 to ARMv8 is "approaching saturation," I think there's still a lot of runway left here.

Indeed, according to ARM's most recent analyst day presentation, ARMv8 penetration will reach 50% of smartphones by the end of 2015. One could view this as "approaching saturation" (glass half empty) but I still see 50% of a growing phone market that hasn't transitioned (glass half full).

Increasing graphics/media share

Although ARM is known for its CPU cores, it has been investing heavily in mobile graphics cores and multimedia engines. Traditionally, Imagination Technologies has been known for its leadership position in mobile graphics (if not in raw unit share, in technological prowess), but ARM's designs are becoming increasingly robust and competitive.

For example, smartphone giant Samsung has used ARM's graphics solutions for multiple generations of chips now, including the Exynos 5433, Exynos 7420, and in the upcoming Exynos 8890. Huawei's HiSilicon division, too, seems to favor ARM graphics as well.

Beyond the vertically integrated device vendor and chip vendors, ARM graphics have seen success in the merchant market as well. MediaTek uses ARM graphics IP fairly extensively (though not exclusively) and the company's latest Helio X20 high-end mobile chip will include ARM graphics (moving from Imagination graphics in the prior generation X10 chip).

ARM's graphics investments are clearly starting to pay off nicely.

Physical IP solutions

Finally, ARM has been investing in developing physical IP solutions to help system-on-chip designers more quickly and effectively implement their designs. According to ARM's most recent roadshow presentation, ARM will see increased royalty rates from physical IP targeted at the 14/16-nanometer FinFET manufacturing nodes, which bodes well for ARM as the industry transitions broadly to these technologies in the coming year.

The next billion-dollar iSecret

The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early-in-the-know investors! To be one of them, just click here .

The article 3 Ways ARM Holdings PLC Is Growing Its Mobile Opportunity originally appeared on Fool.com.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

AAPL

Other Topics

Stocks

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More