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

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

Now it is threatening to revoke the license of one of its biggest customers, Qualcomm (QCOM 1.15%). It provided a 60-day notice earlier this month notifying Qualcomm that it was terminating its architecture license agreement, according to a report from Bloomberg. The decision is related to a legal dispute that began in 2022 over whether Qualcomm’s acquisition of Nuvia comes with its Arm licenses.

While Qualcomm could lose access to all-important architectural licenses, investors should take the opportunity to get greedy while others fear and buy shares of the chipmaker.

Image source: Getty Images.

Importance of Arm IP to Qualcomm

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

Qualcomm has a license available for many of its existing chip designs. But it uses architectural licenses in many of its new products by incorporating Nuvia designs into new products.

Qualcomm acquired Nuvia in 2021 to accelerate its chip development. Nuvia’s designs, based on the Arm architecture, are embedded in Qualcomm’s “AI PC” processors and a key part of Qualcomm’s product roadmap for more powerful smartphone processors. Qualcomm eventually sees similar chip designs in automobiles and Internet-of-Things (IoT) devices.

Revoking the architecture 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 of its new chip products and redo its product roadmap, halting its growth along the way.

Will Qualcomm lose its license?

Most companies generally are not in the business of mutual destruction. This seems to be what Arm would be heading towards if it breaks its relationship with Qualcomm.

Qualcomm is very likely one of Arm’s top five customers. Arm’s most important customer is Arm China, which accounted for 21% of its revenue last year. The other four top clients accounted for 33% of its revenue. In other words, cutting ties with Qualcomm would wipe out a good portion of Arm’s revenue.

Moreover, the revocation would also give other customers reason to be bored with Arm. If Arm can’t be relied on to maintain relationships with top customers, that could push more semiconductor companies to look to build on the open-source RISC-V architecture, which would give them more control over the future their.

Tellingly, Arm’s share price took a bigger hit than Qualcomm’s after the news broke. It shows how important Qualcomm is to Arm.

Arm doesn’t want to revoke Qualcomm’s license. It just wants Qualcomm to pay more than the small start-up (Nuvia) did when it originally negotiated the license agreement. This is a negotiating tactic and a risky one for both parties.

However, it is unlikely that the annulment will be finalized and more likely the two parties will find a way to continue their relationship.

Time to get greedy

With investors wringing their hands over Qualcomm’s future, it may be a good opportunity to buy shares of the chipmaker.

As noted, the company is developing new chip designs for PCs and smartphones, along with 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 so as not to quickly drain batteries or increase users’ energy bills.

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

At the time of writing, Qualcomm shares are trading for a forward P/E ratio of just 15. That’s an incredibly attractive price for a chipmaker that could be at the heart of the next phase of AI. While the Arm dispute represents an overshoot on future results, investors should not give it too much weight. The chances of Qualcomm not being able to negotiate a license for the newest chips seem unlikely, given the importance of the deal to both sides. Meanwhile, the long-term potential for Qualcomm remains strong, even if it has to pay a bit more for the Arm license.