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HP Finally Gets It Right, Flexes ARM

Stocks in this article: HPQ ARMH GOOG AAPL INTC

PALO ALTO, Calif. ( TheStreet) -- HP (HPQ - Get Report), after spending the last few months frightening the life out of investors, has taken a big step in the right direction by becoming the first major server player to support ARM's (ARMH) low-power chips.

New HP CEO Meg Whitman won plaudits last week when she announced that the tech bellwether would keep its computer division, easing investor fears about the company's long-term strategy. With the ARM announcement, however, HP may also regain some of its innovative edge that has dulled in recent years.

A semiconductor star, ARM's technology has typically been found in smartphones and tablets, although HP will use the chips within a soon-to-be-launched server technology called Redstone.

"The low-power attributes of ARM's architecture cloud give HP an advantage when selling into environments where power consumption is a critical factor," explained Brian Marshall, an analyst at International Strategy & Investment Group, in a note. "We think HP is targeting cloud-computing applications in the data center with the Redstone platform."

Companies such as Google (GOOG) and Apple (AAPL - Get Report), which has built a massive new data center in Maiden, North Carolina, are famed for their reliance on vast server farms, so HP clearly sees a big market opportunity.

The initial Redstone offering, launched in the first half of next year, will be built using ARM chip technology adapted by Texas startup Calxeda. The Austin-based firm touts its ARM Cortex-based EverCore processor as a way for companies to slash data center energy consumption by up to 90%.

Redstone incorporates 2,800 servers in a single data center rack, which HP says will significantly reduce the amount of cabling and switching needed by companies. Based on the Palo Alto, Calif.-based firm's own lab tests, Redstone, could reduce data center complexity by up to 97% compared to a traditional server.

Subsequent versions of Redstone will be built using Atom processors from HP's longstanding chip partner Intel (INTC - Get Report), according to HP.

International Strategy & Investment Group's Marshall estimates that if ARM-based CPUs feature in 30% of its Industry Standard Server (ISS) shipments in 2012, HP could raise its ISS operating margin profile by 150 basis points.

"This development would add around $220 million in incremental operating income to HP in calendar year 2012 and drive our fiscal 2012 $4 EPS estimate to $4.09," he added.

HP shares rose 60 cents, or 2.34%, to $26.24 on Tuesday, far outpacing the broader advance in tech stocks that saw the Nasdaq rise 1.12%.

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to http://twitter.com/jamesjrogers.

>To submit a news tip, send an email to: tips@thestreet.com.

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