Microsoft (MSFT) Reportedly Mulling on Designing Chips In-House

Microsoft MSFT is collaborating with Arm Ltd to design processors in-house for its data center operations and server computers that power its cloud service platform, reported Bloomberg citing familiar sources.

The software giant is also looking to build chips for its Surface line of PCs, added the report. However, there has been no official word on the matter from Microsoft or Arm Ltd.

Microsoft already utilizes Arm-based chips from Qualcomm QCOM for a few models of its Surface line of PCs. The company also leverages chips from Intel INTC for majority of its Surface line of laptops and PCs as well as for its Azure cloud platform. Intel is the dominant player in the server chip market, accounting for more than 90% of the market.

Expectedly, Intel stock was hit hard post this development. The stock fell 6.3% to $47.46 on Dec 18.

Microsoft’s Rationale for Designing Chips In-house

Bloomberg added that tech companies are ramping up chip designing to aid in processing of huge data generated by smartphones and cloud computing. The exponential growth in data has triggered demand for new and high-performing chips.

Microsoft Corporation (NASDAQ:MSFT) Price and Consensus

Microsoft Corporation price-consensus-chart | Microsoft Corporation Quote

Microsoft’s Azure cloud service is one of the leading players in the cloud space. Designing a customized chip for its server computers is expected to yield higher performance gains and strengthen its competitive stance against Amazon’s cloud unit, Amazon (NASDAQ:AMZN) Web Services.

Many companies are deploying innovative technologies like Artificial Intelligence (AI) for automating data processing. This in turn is boosting the demand for newer and more efficient processors.

Moreover, increasing cost of electricity to power data centers that support services like Microsoft 365 is fuelling the need for energy-efficient chips. The company's collaboration will Arm Ltd makes sense as Arm-based processors are power-efficient, added Bloomberg. Microsoft, which carries a Zacks Rank #2 (Buy), has also been on a hiring spree for processor engineers, stated the report.

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Not just Microsoft, but other tech giants are also designing custom chips for cost and performance benefits, which is a concern for Intel’s.

Apple AAPL also announced its first in-house processors for its Mac devices, last month. The Arm-based M1 chips will enhance performance without affecting the battery life. The company already designs its own chips for its flagship product, iPhone.

Apple stated that M1 chips are capable of delivering up to 3.5 times and 6 times faster CPU and GPU performance, respectively. The M1 chip is embedded with Apple’s Neural Engine. The Neural Engine in M1 features 16-core architecture and is capable of processing 11 trillion operations per second. This in turn will accelerate up to 15 times faster machine learning performance.

In 2018, Amazon forayed into server chip designing with its Graviton processors custom built for Amazon Web Services.

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