There’s a single company behind some of the world’s biggest chip designers, and that company has a lot of power in the industry.

Arm Holders‘ (ARM 4.36%) Intellectual property is essential to producing chips for a wide range of products, from the smartphone in your pocket to next-generation educational data centers. artificial intelligence (AI). It licenses its CPU architecture and IP to customers and receives licensing fees and royalties in return.

Now it is threatening to revoke the license of one of its biggest customers. Qualcomm (QCOM 1.15%). It was stated that the company gave Qualcomm a 60-day notice earlier this month informing it that it was canceling the architecture licensing agreement. Bloomberg. The decision relates to a legal dispute that began in 2022 over whether Qualcomm’s acquisition of Nuvia will come with Arm licenses.

While Qualcomm could potentially lose access to crucial Arm architecture licenses, investors should seize the opportunity, buying shares of the chipmaker while others fear.

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The importance of Arm’s IP to Qualcomm

It’s important to note that Arm has two types of licenses. The company plans to revoke Qualcomm’s architecture license, which allows the chip designer to take Arm’s architecture and add or remove components to create entirely new and unique designs. Arm also offers ready-made licenses that allow customers to incorporate Arm’s CPU designs into their own devices.

Qualcomm has an off-the-shelf license for most of its current chip designs. However, it uses architectural license in many of its new products by incorporating Nuvia’s designs into new products.

Qualcomm acquired Nuvia in 2021 to accelerate chip development. Nuvia’s designs, based on the Arm architecture, are being incorporated into Qualcomm’s “AI PC” CPUs and are a key part of Qualcomm’s product roadmap for more powerful smartphone CPUs. Qualcomm will eventually start to see similar chip designs in cars and Internet of Things (IoT) devices.

Revocation of the architectural license would be a major blow to Qualcomm’s business. Qualcomm’s chip business accounts for about 85% of the company’s revenue and is growing faster than its licensing business. Without the Arm architecture license, Qualcomm would have to stop selling many new chip products and reorganize its product roadmap and halt growth.

Will Qualcomm lose its license?

Most companies are generally not in the business of mutual destruction. This seems to be the path Arm will take if it breaks its relationship with Qualcomm.

Qualcomm is probably one of Arm’s top five customers. Arm’s largest customer is Arm China, which accounted for 21% of its revenue last year. Four other major customers accounted for 33% of its revenue. In other words, cutting ties with Qualcomm would wipe out a significant portion of Arm’s revenue.

Moreover, cancellation would give other customers reasons to be fed up with Arm. If Arm can’t be trusted to maintain relationships with high-end customers, that could prompt more semiconductor companies to develop open-source RISC-V architecture, giving them more control over their future.

It appears that Arm’s share price took a bigger hit than Qualcomm’s after the news was published. It shows how important Qualcomm is to Arm.

Arm does not want to revoke Qualcomm’s license. It just wants Qualcomm to pay more than the small start-up (Nuvia) did when negotiating the licensing deal. This is a negotiation tactic and is risky for both parties.

However, cancellation is unlikely to happen and it is more likely that the two parties will find a way to maintain their relationship.

It’s time to be greedy

At a time when investors are uncertain about Qualcomm’s future, this could be a good opportunity to buy shares of the chipmaker.

As previously mentioned, the company is developing new chip designs for PCs and smartphones, and has plans to incorporate the same designs into chips for cars and IoT devices. The focus of these chips is the ability to run artificial intelligence applications on the device. This requires highly efficient processing capabilities to prevent batteries from draining quickly or users’ electricity bills from skyrocketing.

Many expect on-device AI to be the next step for artificial intelligence. Apple It’s pioneering such capabilities with the launch of Apple Intelligence, designed to complete most on-device AI-related tasks and keep your data private. Qualcomm could bring similar capabilities to Windows PCs, Android phones and other devices.

At the time of this writing, Qualcomm shares are trading for some amount. forward P/E the rate is just 15. That’s an incredibly attractive price for a chipmaker that could be at the center of the next phase of artificial intelligence. While the Arm dispute poses a bulge to future outcomes, investors shouldn’t put too much weight on it. Given the importance of the deal for both parties, it seems unlikely that Qualcomm will be unable to negotiate licensing for its latest chips. Meanwhile, Qualcomm’s long-term potential remains strong, even if Arm has to pay a little more for its license.