Arm vs. x86 – The Gauntlet pt. II.

This time Qualcomm is serious.

• While the technology world continues to jump up and down over generative AI, the most consequential challenge to Intel and AMD’s dominance in laptop processors is almost ready for launch and this time it might just work.
• Intel has more than enough reason to scoff at the prospect of losing market share in laptop processors to Arm-based rivals as on both of the two previous occasions this has been tried, it has been a miserable failure.
• For decades, the x86 processor has dominated the laptop market as it was thought that when it came to choosing a processor architecture (x86, Arm, RISC-V etc) one had to choose either performance or battery life.
• However, this all changed in 2020 when Apple launched the M1 processor that conclusively proved that it was possible to have professional-grade performance on an Arm-based processor with excellent battery life.
• Furthermore, it quickly became clear that Apple would not have a lock on this ability as it emerged that it was suing Nuvia, a start-up aimed at creating high-performance Arm-based processors.
• This was a sure sign that the changes that it had made in its processors were not patentable, which is why it sought to stop competition using the legal system.
• However, the lawsuit never went anywhere, and Qualcomm ended up buying Nuvia so that it could replace the Arm-processors that it had been using with its own designs.
• I have long thought that this is the most consequential acquisition that Qualcomm has made since Flarion (bought for 4G), as it gave it a launchpad from which to launch an M-series competitor for Windows laptops.
• It also offers the possibility to roll the processor design across all of its other segments with smartphones coming in 2024 and I suspect automotive and cloud soon to follow.
• Qualcomm was always going to find this much harder than Apple as it lacks the vertical integration that Apple has which made it much easier to ensure that hardware and software were optimised to work together.
• Furthermore, it also has to deal with the huge diversity of hardware specifications and range of potential components all of which Intel has been dealing with for decades.
• The fruits of this development were launched at Snapdragon Summit in 2023 where, if Qualcomm’s numbers are accurate, the Snapdragon X Elite processor is only marginally behind the M3 Max chip (see here).
• Qualcomm does not have to deal with Apple in laptop processors and so the benchmarks that really matter are against x86 processors and here the X Elite is on strong ground.
• I am expecting that Qualcomm will launch the Snapdragon X chips pretty soon and it looks like there will be 8 or more SKUs.
• Four of these would be for high-end laptops powered by the X Elite and 4 for mid-range powered by X Plus (see here).
• This is an early indication of how seriously Qualcomm is going after this market and every conversation I have had indicates that the emulation is working better than Rosetta Stone (Apple’s) and at lower power consumption.
• This is crucial as it is this that will ensure that all Windows apps run on arm-based Windows machines and do so in a way that user does not notice.
• Only if these laptops offer a seamless experience will the users adopt them, and we will begin to see the first devices launched at Computex in June this year.
• The effort that is being put into this is orders of magnitude greater than last time this was tried which I think gives it a much greater chance of success.
• In the short to medium term, this could be much more consequential for Qualcomm than AI at the edge in smartphones, as it is a large market with high processor ASPs where Qualcomm has almost 0% share.
• Furthermore, with Apple not competing in merchant silicon and Arm’s version of this (Blackhawk) probably 6 months away, Qualcomm could have 12 to 18 months of only having to compete against x86 in the laptop CPU market.
• If Microsoft has done its job properly and the port to Arm works seamlessly, then there could be a material increase in Qualcomm’s revenues from taking share from Intel and AMD.
• AI at the edge makes a lot of sense and also offers plenty of upside but I think it is further away in terms of time and in many edge devices, Qualcomm is already present.
• However, while the technology media and glitterati continue to guzzle AI cool aid by the gallon, this opportunity is being completely ignored meaning that there could be some surprises in store later in 2024 and 2025.
• The easy money in Qualcomm has been made with the recent rally from $106 (where I picked it up) but when considering taking profits, I have concluded that there is more upside.
• The shares are no longer a bargain but at 15.2x 2024 and 13.8x 2025 PER (which will be lower if any of this new strategy pays off), I am very happy to hold on as I am sure there is more to come.