Arm Holdings and Qualcomm: A High-Stakes Licensing Dispute
The tech world stands at a critical juncture as Arm Holdings (NASDAQ: ARM) considers revoking a key licensing agreement with Qualcomm (NASDAQ: QCOM), creating significant implications for both companies and the semiconductor industry.
Arm’s Intellectual Property Power
Arm’s intellectual property is at the core of many electronic devices, from smartphones to data centers that power advanced artificial intelligence (AI). The company licenses its CPU architecture and IP, earning licensing fees and royalties from clients that rely on its technology.
Recently, Arm indicated it might cancel its architectural license with Qualcomm, sending ripples through the market. A report from Bloomberg cited a 60-day notice issued by Arm, tied to a legal dispute over Qualcomm’s acquisition of Nuvia in 2022 and whether it included Arm licenses.
Understanding Arm’s Licensing Structure
Arm’s licensing model includes two types of agreements: architectural licenses and off-the-shelf licenses. The architectural license enables chip designers to modify Arm’s architecture to create new designs, while off-the-shelf licenses allow companies to integrate Arm’s existing designs directly into their products.
Qualcomm holds an off-the-shelf license for many chips it currently markets but relies on architectural licenses to advance its new offerings, especially those that incorporate Nuvia’s designs.
Impacts of Revoking Qualcomm’s License
Qualcomm’s acquisition of Nuvia in 2021 aimed to enhance its chip development for powerful CPUs, including those for AI applications. Losing access to Arm’s architectural licenses could put a stop to many of Qualcomm’s new products, significantly affecting a division that constitutes about 85% of its revenue.
This would necessitate a complete overhaul of its product roadmap, stalling growth at a critical point in the evolving tech landscape.
Potential Consequences for Arm and Qualcomm
Cutting ties with one of its largest customers seems counterproductive for Arm. Qualcomm likely ranks among Arm’s top five clients, with Arm China being the largest, accounting for 21% of Arm’s revenue last year. Severing ties would not only reduce Arm’s revenue significantly, but it could also raise concerns among other clients about their stability and reliability.
Arm’s stock reacted negatively to the news, reflecting how crucial Qualcomm is to its business. The company seems to be using this situation as a negotiation tactic, aiming to increase fees rather than fully cancel the license.
Seizing Investment Opportunities
Currently, investors may find this a prime moment to purchase Qualcomm shares as uncertainty hangs over the company. Qualcomm is working on innovative chip designs for PCs, smartphones, and emerging sectors like automobiles and IoT devices, all while focusing on efficient AI processing.
With Qualcomm’s shares trading at a forward P/E ratio of 15, the investment appeal increases, especially as the need for on-device AI capabilities grows. While potential license issues exist, the strong fundamentals of Qualcomm’s technology suggest it could still emerge as a leader in the next phase of AI advancement.
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*Stock Advisor returns as of October 28, 2024
Adam Levy holds positions in Apple and Qualcomm. The Motley Fool has positions in and recommends Apple and Qualcomm. The Motley Fool maintains a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
