Zacks_Analysts' Blog : Microsoft ARMs Its Way Into Mobile - Analyst Blog

While it is still mostly speculation, there has been a flood of news reports about an agreement between Microsoft Corp (MSFT) and ARM Holdings (ARMH) that would effectively end the exclusivity of Windows on the x86 architecture used by Intel Corp (INTC) and Advanced Micro Devices (AMD).

It has been rumored that the Microsoft-ARM plans will be discussed at the CES 2011 to be held next month. But Microsoft’s exact plans remain shrouded in mystery, since the company could be building either the Windows Phone 7 OS or the Windows 7 OS to support ARM chips.

For Microsoft, it makes more sense to build on the former, since ARM is basically dominant in portable devices (mainly smartphones and tablets), where Microsoft would like a stronger share. On the other hand, its software is well-entrenched and growing in the more traditional computing devices, so it does not need ARM here. Additionally, the ARM architecture probably does not have sufficient computing power to run Windows 7.

So what could be in it for ARM? The architecture developed and licensed by the company is by far the dominant one used in portable devices. It would therefore like a share of the more traditional computing market and an alliance with Microsoft could just give it a toe-hold here.

It is apparent that Intel (INTC)/AMD (AMD) and ARM have the same goal -- the development of technology that could put computing power and low energy consumption in the same package. While Intel and AMD are working from the high computing power/high energy consumption side of the fence, ARM is working from the low computing power/low energy consumption side.

So whatever they do, there may be some reason to cheer down the road, but we don’t really see anything significant happening very soon. Let us also not forget the new technology from MIPS Technologies (the recently announced MIPS32 1074K family of application processors) that are intended to challenge both ARM and x86 architectures.

Which brings us to another mega OS -- Google Inc’s (GOOG) Android. While built on ARM architecture, the OS does not work on chip architectures and it is for this reason that the MIPS technology could gain ground. However, the company is a very tiny David compared to very big Intel/ARM Goliaths.

Microsoft’s decision to build a Windows platform supporting ARM could also be a first step toward a more neutral -- and therefore more universal -- OS, such as the Android.

We have been watching these stocks performances today, and ARM Holdings has responded the most, rising sharply at first and then tracking to around a 3.5% increase. It therefore looks as if investors perceive ARM’s advantage to be the most significant.

Google and Intel shares currently have a Zacks #2 Rank, implying a short-term Buy recommendation. Microsoft and AMD shares are ranked #3 (short-term Hold recommendation) and ARMH #4 (short-term Sell recommendation).