Could Mobile Devices and Tablets be Bullish for Intel?
Is This Mobile/Tablet Trend A Good or Bad Thing for Intel?
Intel (NASDAQ: INTC) stock has been sliding downward since May 2 when it was trading over $29/share. It’s now down to a little over $25/share with continued weakness and negative sentiment in the media. One of the reasons that the media is using to explain this pullback is how mobile devices such as tablets and phones are hurting PC sales.
We just saw a bad quarter from Dell (NASDAQ: DELL) as their stock dropped almost 20% after missing earnings estimates. Dell’s profit fell 33% in its first quarter due to weak sales to consumers, businesses and the public sector. Jim Cramer was on Mad Money saying how there is a great secular decline in the personal computer, laptop and netbook. Well we certainly have seen some of these trends hit Dell.
So, does all this mean that Intel is not positioned well to take advantage of this trend in declining desktop/laptop sales and into the rapidly growing market for mobile/tablets? If Intel is in trouble, we are not seeing it in their numbers and for good reason which I’ll explain. Intel beat earnings estimates in each of the last four quarters. Estimates for 2012 and 2013 have been rising as well. Better yet, I think Intel will beat these rising estimates.
Can Intel Compete In Mobile Against ARM and Nvidia?
So again, the trend does seem to be showing that desktops and laptops are in slow decline and mobile is on fire. ARM Holdings (NASDAQ: ARMH) and Nvidia (NASDAQ: NVDA) are dominating the mobile space while poor old Intel is just getting started there. Yes it is true that Intel is late to the mobile chip game but they are off to quite a good start so far. Anandtech rated Intel’s “Medfield” smartphone chip No. 1 in some benchmarks stating it delivers “tablet like scores”. They said it handily beats some of the fastest phones on the market.
So make no mistake, Intel will be a formidable competitor in the mobile chip space. They have an enormous warchest of patented intellectual property along with valuable trade secrets. Intel has some of the best chip designers in the world and their manufacturing prowess is far ahead of their competition.
Intel’s Mobile Competition
Nvidia and ARM both are the main competition for Intel to take share from. Nvidia offers their Tegra processor (an ARM design) for phones and tablets. They have scored placement in Acer, Dell, ASUS and Lenovo tablets while Tegra chips are shipped in HTC, Motorola, LG and Samsung phones.
ARM Holdings is a fabless UK based chip maker, meaning it designs chips and lets other companies manufacture them. They have a wide array of low power chip designs that are “SoCs” (System on a Chip). This is the company that Intel has its target on. With a paltry 10B market cap one has to wonder if or when Intel might acquire ARM Holdings to get a jump-start into mobile. Perhaps the regulatory approval would be too difficult to obtain for such an acquisition? I would think it would be a good strategic move if they could get the approval for it.
Back in January 2012 Intel and Motorola announced a multi-year agreement focused on the development of Intel powered Android based phones and tablets. This is a huge catalyst for Intel in the mobile space. Motorola will be building devices using the Medfield processor. One has to think that Moto compared ARM chips to Intel’s and somewhere the performance and power consumption spec’s were either superior or so competitive that they entered into this agreement.
Once the 22nm Intel processors for mobile hit in 2013 its going to be very difficult for any company to compete with them. Intel could end up taking the dominant market share in mobile/tablets faster then anyone anticipates. This is why I do not listen to analysts who truly do not understand the technology.
So The Future is Bright in Mobile but Intel’s Future is in the Clouds…
The real bullish macro trend for Intel is in the server farm space. Cloud computing is made up of high powered servers. Hosting farms all house servers sporting fast and high margin Intel server chips. Intel essentially has no competition in the server space. ARM is not a credible player in this space nor is Advanced Micro Devices. Furthermore, Intel’s new 22nm chips with their new tri-gate will simply blow away the performance and value proposition in the server space leaving would be competitors even further in the dust.
While ARM is going to attempt to compete in the server space they will have many obstacles. Intel’s tri-gate technology essentially uses 3D space which not only gives enormous performance boosts but significant power reduction. Power reduction is ARM’s main claim to fame but Intel’s innovation never stops. The new Ivy Bridge chip is a 22nm design and is their first high volume chip to use this new 3D technology. Intel’s lead in technology and manufacturing will keep sales of these high power and high margin server chips humming along as they try to keep up with the explosion in mobile devices.
Even if ARM designed 22nm chips the problem is nobody besides Intel will have the capability or capacity to produce them anytime soon. This is where Intel’s vertical integration and lead in manufacturing makes them a deadly competitor in the semiconductor space.
Simple Formula. Mobile = High Powered Servers = Internet
So for those who are not well versed in the technology sector you might ask why do I even mention server farms and cloud computing? Because every mobile device is a drag on these servers. When you check your gMail, login to FaceBook, read news on Yahoo, hit Google Maps, visit ANY website, download an app, play Zynga games, use iCloud, Google Drive, etc, basically you are hitting a server in a hosting facility somewhere. These servers almost all run Intel chips in them. They do not run the lower margin, less expensive chips that get sold into consumer desktops and laptops either but instead the high price, high margin cutting edge chips. Companies purchase these expensive Intel server chips because the ROI to be on the bleeding edge of chip speed is worth it.
The Answer is Yes. Mobile & Tablets are VERY Bullish for Intel!
Companies like Apple, Google, Zynga, Rackspace, Amazon and Facebook just to name a few are adding 100’s if not 1000’s of servers daily. As mobile proliferates, the need to add thousands of servers just to keep up increases. Intel is riding this powerful wave right now and for the foreseeable future. So while Intel has a robust traditional PC market they continue to crush it in the data centers. As Intel expands their mobile chip offerings I would expect them to start to take share in the mobile space away from ARM and Nvidia, perhaps in a significant way.
Desktops and Laptops are not going away for a very long time in my opinion. We will see some decline as some consumers opt for tablets instead of laptops or perhaps even desktops. However, for me there is nothing that can replace screen size and vast local storage so a desktop is part of my computing arsenal along with my tablet and phone.
Looking out further I see tablets getting much more powerful. We’ll be docking tablets either hard-wired or wireless to large screens and external storage (cloud or local). Your tablet will be your computer or gateway to the cloud and you will be able to do more with it someday than you can with today’s best desktops. We are a few years away from this but eventually we’ll get there. Thankfully, one thing you can’t stop is progress.