Which Stocks Stand to Benefit From Microsoft Designing Their Own Chips?

Intel is definitely not one of them.

About a month ago I wrote a story about Apple’s new silicon and how it blows out of the water anything that’s out there. I also wrote that it would probably be a good idea if Microsoft got in on the action. The problem is that as of now it seems very difficult for anyone to get in the game, Apple might just be playing in a different league already. On the other hand, they can’t just sit around and do nothing.

It seems that Microsoft agrees and two weeks ago, it was reported that they would be designing their own ARM chips, both for their servers and their Surface line of PCs.

This brings up a couple of interesting questions as buying a Windows PC has always been a bit more complex than buying a Mac. Macs you can only get from Apple, while Windows laptops are provided by a number of companies, each one with its own unique selling point. Different price points, different qualities, and different use cases. There is pretty much something for everyone out there, each one designed at Intel’s and to a less extend AMD’s discretion.

But what happens when ARM-based chips become the norm, who will replace Intel and AMD as the main processor providers, and what will happen to windows computers manufacturers like DELL and HP, how are they supposed to get their hands on some good ARM chips?

It's definitely a confusing and exciting time for the chip industry, with a potential shakeup in the leaderboards for the first time in decades that could be very lucrative for investors.

The Chip Manufacturers that will probably rise to the occasion.

The other hurdle that Microsoft is going to need to get over, is manufacturing. Who is going to manufacture these chips for them, and can they be as powerful? Apple’s M1 chips are actually made by TSMC and their unique 5nm manufacturing process and Cupertino is actually rumored to have booked it entirely, leaving no space for other orders. If Microsoft wants to build chips on par with Apple’s not only do they need to design them but they would probably need to find someone to manufacture them, preferably with the best process available. Right now that’s TSMC’s 5nm process and that’s all booked.

Whose left? There is one more company coming out with a 5nm chip this year and that’s Qualcomm. We don’t know everything about their new Snapdragon 875, but what we do know is that it's going to be manufactured by Samsung’s 5nm process, which isn’t TSMC, but it's close. Microsoft has already partnered with Qualcomm for the SQ2 chip that I will talk about in a bit but it’s nowhere near as good as the M1. This might be a clue as to where Microsoft might be looking for future partnerships. It has also been rumored that Samsung might even skip the 4nm process and go directly to 3nm in an effort to outpace TSMC, this might also give Microsoft the advantage it needs if they are to catch up.

The rest of the Windows computer manufacturers are going to be facing the same problem. Intel is from what we have seen in no position to compete with the new ARM chips. They will need to find a company to design and manufacture these chips for them. Whether Microsoft’s chips can be used in laptops other than their own lineup is not as of yet clear.

For Qualcomm it seems that they are perfectly positioned for this new market segment. They already provide various chips to all Android phone manufacturers and could potentially with some help from Microsoft, much like Apple did with their A14 bionic and modified it into the M1, modify their snapdragon processors for laptops. They would basically be replacing Intel, who as of now is in no position to put up a fight. In fact, Qualcomm’s CEO hinted at something along those lines during an interview with the Verge:

One of the great things about the M1, the way we look at it, we’re super happy with that announcement. Very happy. And kudos to Apple because it validates our belief. It basically validates our beliefs that, you know, that the mobile user is defining what they expect out of the PC experience.

And when adding Apple to that conversation, you started to see that the ecosystem is moving. Great example: I believe it was probably this week, if not the week before that Adobe announced a bunch of applications, that are all ARM native. And once you make it ARM native, performance increases as you have now app compatibility.

So that overall is a very good sign. The ecosystem is going to move and it showed that Microsoft and Qualcomm were in the right trajectory. It’s about battery life, it’s about connected, it’s about a whole different multimedia experience.

Even if this is true, Apple’s true advantage is not the ARM chip, it’s something else, something that would require Microsoft to change their whole way of doing things.

Total integration is the name of the game.

Designing their own chips is a step in the right direction but it probably won’t take them all the way. Apple not only designs its own chips but the entire laptop from scratch. This gives it complete control of the design and a provides a more streamlined performance.While Microsoft does have more overall control of their own Surface lineup, it’s not clear if they have as much control as Apple.

To further drive home the point that is not just the ARM chip, it's worth mentioning that Microsoft already has a version of Windows that runs natively on ARM and a very expensive product to go with it. The Surface Pro X is a laptop/tablet that runs with the aforementioned SQ2 ARM chip with ARM native Windows, but as you can see from this recent comparison by Linus the performance isn’t even close. Rather embarrassingly for Microsoft, Windows 10 for ARM actually runs better on the M1 Mac through emulation than it does on the Surface Pro X. Unfortunately this gives them a participation award but not exactly a place on the podium, and they wont manage to climb up there unless their products become more integrated.

TL;DR

There are very clear signs that the industry is moving towards a total ARM future, spearheaded by Apple and their M1 chips. Microsoft is perfectly aware, and they are working on both sides of the equation. They are building a version of Windows that has better integration with ARM chips as well as designing ARM chips that will work better with Windows. The companies that are probably best positioned to benefit are TSMC, Qualcomm, and Samsung. By how much depends on how quickly Microsoft moves to set up these partnerships. The question is: Is it too late?

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