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

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

He is now threatening to revoke the license of one of his biggest clients, Qualcomm (QCOM 1.15%). It provided 60 days’ notice earlier this month, informing Qualcomm that it was canceling its architectural licensing agreement, according to a report from Bloomberg. The decision is related to a legal dispute started in 2022 over whether Qualcomm’s acquisition of Nuvia comes with its Arm licenses.

With Qualcomm potentially losing access to the all-important Arm architectural licenses, investors should take the opportunity to get greedy while others get scared and buy shares of the chipmaker.

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The importance of Arm’s intellectual property to Qualcomm

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

Qualcomm has a standard license for many of its existing chip designs. But it uses architectural licensing 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 integrated into Qualcomm’s “AI PC” processors and are a key part of Qualcomm’s product roadmap for more powerful smartphone processors. Qualcomm eventually discovered 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 architectural license, Qualcomm would have to stop selling many of its new chip products and rework its product roadmap, bringing its growth to a grinding halt.

Will Qualcomm lose its license?

Most companies are generally not in the business of mutual destruction. This appears to be the direction Arm would be heading if it severed its relationship with Qualcomm.

Qualcomm is most likely one of Arm’s top five customers. Arm’s largest customer is Arm China, which accounted for 21% of its revenue last year. The other four main customers accounted for 33% of its turnover. In other words, cutting ties with Qualcomm would eliminate a good chunk of Arm’s revenue.

Additionally, the revocation would also give other customers reason to grow tired of Arm. If Arm can’t be trusted to maintain its relationships with its major customers, that could push more semiconductor companies to consider relying on the open source RISC-V architecture, which would give them more control on their future.

It’s telling that Arm’s stock price was hit harder than Qualcomm’s after the news broke. This shows how important Qualcomm is to Arm.

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

However, it is unlikely that the annulment will go through and it is more likely that both parties will find a way to continue their relationship.

It’s time to get greedy

As investors worry about Qualcomm’s future, this could be a good opportunity to buy shares of the chipmaker.

As mentioned, the company is developing new chip designs for PCs and smartphones and plans to incorporate the same designs into chips for automobiles and IoT devices. The goal of these chips is the ability to run artificial intelligence applications on the device. This requires highly efficient processing capabilities, so they don’t quickly deplete batteries or increase users’ electricity bills.

Many expect in-device AI to be the next step in artificial intelligence. Apple ushers in such capabilities with the rollout of Apple Intelligence, designed to perform most AI-related tasks on-device, keeping your data private. Qualcomm could bring similar features to Windows PCs, Android phones and other devices.

As of this writing, Qualcomm shares are trading at a Forward P/E ratio of just 15. That’s an incredibly attractive price for a chipmaker that could be at the center of the next phase of AI. Although the Arm dispute poses a risk to future results, investors should not place too much emphasis on it. The chances of Qualcomm failing to negotiate a license for its new chips seem unlikely given the importance of the deal to both parties. In the meantime, Qualcomm’s long-term potential remains strong, even if it has to pay a little more for its Arm license.