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A group of semiconductor stocks just got hit with a shock wave from an unexpected source.
The shock wave came from Apple Inc. (NASDAQ: AAPL) with the Nov. 10 introduction of its self-designed M1 processor for its Mac line of computers.
This new "Apple Silicon" will disrupt the makers of CPUs - the processors that power our PCs as well as servers and mainframes - completely changing this sector's dynamics.
It may seem odd that a change to the CPU of the Mac - which only makes up about 8% of the global PC market - would have such a dramatic impact on semiconductor stocks.
But the new M1 chip is about much more than the Mac, or even Apple's place in the PC market. The extraordinary performance of the M1 will force a rethinking of many long-held assumptions in the semiconductor world.
We're looking at an inflection point that will seriously threaten the position of some semiconductor companies while opening a window of opportunity for others.
Today, we're going to tell you which semiconductor stocks will benefit - and which will struggle.
Why Apple's New Chip Is Such a Big Deal
First, a little background on why Apple's new chip is such a difference-maker.
The M1 is a beefed-up variant of the A-series processors Apple has used for years in the iPhone and iPad. Apple designs the chips in-house and has them fabricated by Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM). The designs are based on technology licensed from Arm Holdings Inc. (NASDAQ: ARMH).
Arm is an unusual semiconductor company in that it doesn't sell chips. It licenses its core designs to other chipmakers, which then modify and adapt them - known as ARM-based designs from the original acronym "Advanced RISC Machines." Most of the top semiconductor firms license technology from Arm.
You probably own at least one device powered by ARM-based chips, which are widely used in smartphones, tablets, and smart TVs. Until now, ARM-based chips have been better suited for mobile devices, not PCs. That's because ARM designs use less power than Intel Corp.'s (NASDAQ: INTC) industry-standard x86-based CPUs.
But x86 chips had the advantage of having more computing muscle, making them better for PCs and servers. As a result, ARM has had almost no presence in that market.
People have tried to make ARM more competitive in the PC realm. Qualcomm Corp. (NASDAQ: QCOM) and Microsoft Corp. (NASDAQ: MSFT) have been struggling to perfect "Windows on ARM" for about four years. But performance has lagged and been compounded by software incompatibilities.
So Apple's decision to go all-in on ARM-based chips for its Mac platform looked to many to be dangerously risky.
But then Apple unveiled the M1. Apple made some almost-too-good-to-be-true claims about its three new Macs - two entry-level models (the Mac Mini and the MacBook Air) and a 13-inch MacBook Pro.
The company said the CPU in the new MacBook Air is 3.5 times faster than the Intel-powered one it replaces and that the graphics (integrated into the M1) is five times faster. That performance is all the more remarkable considering the Air has no cooling fan.
But the most shocking claim was the increase in battery life. The new MacBook Pro's battery life doubles the time of its predecessor - from 10 hours to an almost unheard-of 20 hours.
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Still, the real proof would come when the tech media could test these Macs for themselves.
Multiple "geek" websites, from TechCrunch to ExtremeTech to Ars Technica, were slightly shocked to find Apple was not exaggerating.
The M1 Macs not only left their predecessors in the dust - but much of the Intel-powered PC competition as well.
Check out these headlines:
You can see the benchmarks for yourself - and the breathless praise for the M1 - by clicking on the links to those websites.
The M1 Is Just a Glimpse of What's to Come
Apple has achieved what many didn't think possible - an ARM-based chip that can beat Intel on performance while using far less energy, ensuring extraordinary battery life.
And this is just the first of a one-two punch. Apple's iMac and Mac Pro desktops due for their own M1 overhaul over the next two years will get an even better, faster version.
A big part of why the Apple's chip offers such startling efficiency is the integration of its design. It's a true system on a chip (SoC), marrying a traditional CPU with a graphics processor, a machine learning processor (the Neural Engine) and the system memory.
In the ARM world, this sort of integration isn't unusual. But PCs typically have memory and graphics chips separate from the CPU. So here Apple clearly has thrown down the gauntlet to Intel and Advanced Micro Devices Inc. (NASDAQ: AMD).
Of further concern to the PC CPU makers is Apple's proven prowess as a CPU designer.
Note the consistent, linear gains Apple has made with successive generations of its A-series chips compared to Intel's relative stagnation (see chart).
I expect the same sort of relentless progress from the M series as well. And don't forget, Apple's vertical integration means it can optimize the M1 for the Mac's operating system in ways the Windows PC world cannot duplicate.
Apple's success here proves ARM can match the power of x86 architecture. And that will light a fire under Qualcomm and other ARM chip designers to try and duplicate what Apple has done.
We're on the cusp of a major shake-up in the $40 billion PC/server processor market.
And since Apple won't be selling its chips to anyone, the door is open to other chipmakers to create an M1-like CPU for servers and Windows PCs. The winner of that race stands to reap huge rewards.
Semiconductor Stocks: the Winners and Losers
Here's my take on how this is likely to play out:
WINNER - Apple Inc.: Yes, I know Apple is not thought of as a semiconductor company. But it does design the M1 in house. And the M1 will benefit Apple stock. The Mac made up just under 11% of Apple's revenue in its 2020 fiscal year, but the M1 could boost that substantially.
First, there's the cost savings of not paying Intel $3.4 billion a year for Mac CPUs. Cowen analyst Krish Sankar estimates that alone will add $0.13 a share to Apple's earnings.
I say that's probably too low because it doesn't account for market share gains. The entry-level Macs Apple just introduced represent a tremendous value compared to their Windows-based rivals. And the gap will only grow in the years to come. Mac sales were rising even before the M1, with unit sales up 38.9% in Q3 according to research firm IDC. I expect Mac market share to double over the next two to three years as consumers realize the advantages of the M1. The M1 is just one reason Apple stock still has room to run.
LOSER - Intel Corp.: No semiconductor stock has more to lose from more powerful ARM CPUs than Intel. And it couldn't come at a worse time. Intel has struggled with its manufacturing process and is stuck on 10nm while rival AMD, the only other maker of x86 chips, uses a 7nm process to make its Ryzen CPUs (the M1 uses an even more advanced 5nm process). That's helped AMD eat into Intel's market share. INTC stock is down 23% this year and is up a paltry 3% over the past three years.
Losing Apple as a customer only cost Intel about 4% to 5% of its business - not a death blow by any means. But if other ARM CPU designs get anywhere close to matching the M1's performance - and the chips cost less - PC makers will start ditching Intel as well.
Then there's Intel's lucrative server CPU business. Intel has 95% of that market. For now, ARM chips are no threat to that business. But the M1 suggests a server-capable ARM chip is likely at some point, even if it takes a while. As a chip that uses far less power and produces much less heat, a powerful ARM-based server CPU would deliver huge cost savings to companies that run server farms. And that would be very bad news for Intel.
Intel won't go out of business next year. But its stock will struggle mightily if the firm fails to meet the challenge of ARM-based CPUs.
WINNER - Qualcomm Inc.: In the race to build an ARM-based CPU suitable for the average PC laptop, Qualcomm has a good head start. It's been working with Microsoft for several years to supply a customized ARM-based Snapdragon CPU to power Redmond's Surface Pro laptops. Qualcomm's Snapdragon family also powers about half of the world's Android smartphones.
While the new SQ2 chip is not nearly as powerful as the M1 - its Geekbench 5 scores are about half of the Apple chip's - it exists now. If Qualcomm can crack the performance puzzle, it has at least one eager customer in Microsoft, which continues to put a lot of effort into Windows on ARM.
LOSER - Advanced Micro Devices: While shares of AMD have been doing well (they're up more than 120% over the past 12 months), this chipmaker faces the same threat as Intel. AMD has skillfully exploited Intel's woes to gain ground in the x86 world, but needs to be wary of ARM technology. AMD has dabbled in ARM CPUs (such as its Opteron line) but in recent years has focused more on the x86 Ryzen CPUs. The M1 may force AMD to reconsider allocating more resources to ARM designs. Such a move needs to be made soon, though.
But the M1 also presents a threat to AMD's graphics chip (GPU) business. Apple uses AMD graphics cards in its more advanced Mac models. But with the M1's integrated graphics, it looks like Apple will dispense with discrete graphics in all models - even the mighty Mac Pro. While Apple's graphic card needs are a small part of AMD's business, the concept is likely to take hold among ARM CPU designers as well. And that would threaten AMD's PC graphics business.
WINNER - NVIDIA Corp.: NVIDIA sits in an unusual position regarding ARM. Softbank recently agreed to sell Arm Holdings to NVIDIA for $40 billion. If the deal goes through (not a certainty), it means NVIDIA would collect the global licensing revenue from ARM-based designs. In a world where ARM starts to displace x86, that licensing revenue would accelerate sharply.
But if it embraces the idea of ARM-based CPUs, NVIDIA could realize a far bigger opportunity. Like AMD, NVIDIA has dabbled in ARM technology. But bringing Arm Holding's engineers on board would change the equation. In a conference call after the deal was announced, NVIDIA CEO Jensen Huang suggested the company was likely to build ARM-based CPUs targeted at the server market. With ARM technology in house, NVIDIA would have a big advantage over rivals. And it has the resources to make a serious run at Intel's server business. NVIDIA is already a top semiconductor stock; shares are up 145% over the past 12 months. A strong and rapidly growing ARM business could turbocharge this stock.
WINNER - Taiwan Semiconductor Manufacturing Co. Ltd.: TSMC is not a chip designer but a chip manufacturer - a "fab" in the industry lingo. It was already fabricating all of Apple's ARM-based processors, so the additional M1 business is a win. The company counts among its customers most of the world's chipmakers, including Qualcomm, AMD, and NVIDIA.
TSMC developed the cutting edge 5nm process Apple uses in the M1, and it's planning on rolling out a 3nm process in 2022. That puts TSMC a couple of generations ahead of Intel, making it an even more popular choice for chip firms churning out ARM-based designs. No matter who wins the race to build the best ARM-based CPU, TSMC is likely to get the business.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.
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