There is one company behind some of the biggest chip designers in the world, and it has a lot of power in the industry.
Arm positions‘ (NASDAQ:ARM) Intellectual property is essential to the production of chips for a wide range of products, from the smartphone in your pocket to the data centers that train next-generation artificial intelligence (AI). The company licenses its CPU architecture and IP to customers and receives licensing fees and royalties in return.
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It is now threatening to revoke the license of one of its largest customers. Qualcomm(NASDAQ: QCOM). Earlier this month, the company issued a 60-day notice, notifying Qualcomm that it was terminating its architectural licensing agreement, according to a report from Bloomberg. The decision is related to a legal dispute that started in 2022 over whether Qualcomm’s acquisition of Nuvia comes with arm licenses.
While Qualcomm could potentially lose access to the all-important Arm architecture licenses, investors should take the opportunity to be greedy while others get scared and buy shares of the chipmaker.
Image source: Getty Images.
It is important to note that Arm has two types of licenses. The company plans to revoke Qualcomm’s architecture license, which would allow a chip designer to take Arm’s architecture and add or remove components to create entirely new and unique designs. Arm also offers off-the-shelf licensing, which allows customers to integrate Arm’s CPU designs into their own devices.
Qualcomm has an off-the-shelf license for many of its existing chip designs. But it is using architectural licenses for many of its new products by integrating Nuvia’s designs into new products.
Qualcomm acquired Nuvia in 2021 to accelerate chip development. Nuvia’s designs, based on the Arm architecture, are incorporated into Qualcomm’s “AI PC” CPUs and are a key part of Qualcomm’s product roadmap for more powerful smartphone CPUs. Qualcomm eventually sees similar chip designs in cars and Internet-of-Things (IoT) devices.
Revoking the architectural license would be a major blow to Qualcomm’s business. Qualcomm’s chip business accounts for about 85% of the company’s revenue and is growing faster than its licensing business. Without the Arm architecture license, Qualcomm would have to stop selling many of its new chip products and revise its product roadmap, halting growth.
Most companies generally do not engage in mutual destruction. That seems to be where Arm would go if it were to sever its relationship with Qualcomm.
Qualcomm is most likely one of Arm’s five largest customers. Arm’s largest customer is Arm China, which accounted for 21% of sales last year. The other four top customers accounted for 33% of sales. In other words, cutting ties with Qualcomm would wipe out a good chunk of revenue for Arm.
Moreover, the repeal would also give other customers reasons to be fed up with Arm. If Arm can’t be relied on to maintain relationships with top customers, that could prompt more semiconductor companies to consider building on the open-source RISC-V architecture, which would give them more control over their future give.
Tellingly, Arm’s stock price took a bigger hit than Qualcomm’s after the news broke. It shows how important Qualcomm is to Arm.
Arm does not want to revoke Qualcomm’s license. It just wants Qualcomm to pay more than the small startup (Nuvia) did when it originally negotiated the licensing deal. This is a negotiating tactic and risky for both parties.
However, it is unlikely that the cancellation will go through, and it is more likely that the two parties will find a way to continue their relationship.
With investors concerned about Qualcomm’s future, this could be a good opportunity to buy shares of the chipmaker.
As mentioned, the company is developing new chip designs for PCs and smartphones, along with plans to integrate the same designs into chips for cars and IoT devices. The focus of these chips is on the ability to run artificial intelligence applications on the device. This requires highly efficient processing capabilities so that batteries do not quickly run out or users’ energy bills increase.
Many expect on-device AI to be the next step for artificial intelligence. Apple heralds such capabilities with the rollout of Apple Intelligence, which is designed to perform most AI-related tasks on the device, keeping your data private. Qualcomm could bring similar capabilities to Windows PCs, Android phones and other devices.
As of this writing, Qualcomm stock is trading at a price-to-earnings ratio of just 15. That’s an incredibly attractive price for a chipmaker that could be central to the next phase of AI. While the Arm conflict is a looming factor over future results, investors should not place too much weight on it. The likelihood that Qualcomm will be unable to negotiate a license for its latest chips seems unlikely given the importance of the deal for both parties. Meanwhile, the long-term potential for Qualcomm remains high, even if it has to pay a bit more for its weapons license.
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Adam Levy holds positions at Apple and Qualcomm. The Motley Fool has and recommends positions in Apple and Qualcomm. The Motley Fool has a disclosure policy.
These artificial intelligence (AI) semiconductor stocks could lose access to valuable intellectual property. Here’s why it’s a buy after all. was originally published by The Motley Fool
