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Intel’s New War in Software and Mobile
Posted by: Matthew Indyke and Brian Zen (IP Logged)
Date: October 2, 2012 10:21PM
Intel (INTC) is the biggest software company you’ve never heard of. It designs and builds the essential technologies that serve as the foundation for our many computing devices. The company designs top-notch microprocessors and computer chips that power technological products from servers to laptops to desktop computers and even mobile devices. Its software developers have been one of the company’s secret weapons since its founding a little over 40 years ago. It has shaped itself up into the semiconductor industry leader.
While Intel, in recent years, has successfully penetrated the market for desktops and laptops, it has been less successful getting into the mobile market. Although the company is making every effort to serve the mobile market, it has been stuck in the process of perfecting and adjusting its products to work in mobile devices like tablets and smart phones, something that some of Intel’s competitors have already gotten ahead with. Intel recognizes what’s at stake and is taking matters into its own hands to fix its flaws associated with entering the mobile market.
Analysts are mixed on Intel, but here is why I think the software giant is going to make noise and win over investors in the long term:
· Intel is an extremely well-known brand name, having gained value off of its “Intel Inside” marketing campaign that once helped broaden awareness of the PC, fueling consumer demand for the company’s products. At its current price of $22.65, Intel is cheap. The company has a dominant position in semiconductor technology with a market cap of $114 billion, far above its closest competitors, Advanced Micro Devices (AMD) and NVIDIA (NVDA).
· Intel is reviving its marketing campaign with high hopes it will have a similar effect on mobile products and see similar results to what it experienced with PCs in the 1990s. Intel’s ROA has been above 10% since the beginning of 2010 and currently sits in the range of 15% to 17%, a very healthy number.
· Intel Corporation is making efforts in the next few years to focus on improving the experience of customers, one of the determining factors in any business’ long term survival. Intel is in a solid long-term financial position thanks to strong cash flows and a low debt-to-assets ratio of 0.1, putting the company in a favorable position to transition into a new business philosophy.
Advertising + Hardware + Software = Competitive Edge
Intel has established itself as one of the top 10 brands in the world. Five of the 10 fastest supercomputers in the world now run Intel’s chips. Most of the credit goes to Intel’s years-long push to build software that makes its chips useful for serious scientific work. “We go to work on the hard problems, the really hard problems,” says Renee James, who runs Intel’s software and services business. Those hard problems are rooted in the functionality of the microprocessors and Intel’s ability to get them working at a high level made it stand out.
Intel has thrived over the years through its Intel Inside program, one of the world’s largest co-operative marketing programs, by collaborating closely with various PC makers like Hewlett-Packard (HPQ) and Dell (DELL) on optimizing hardware/software combinations. Intel’s partnerships with these computer manufacturers resulted in an increase in business for Intel, cementing its status as the top company in the industry of semiconductor technology. AMD, its closest competitor, didn’t even get into Dell until 2006. Part of the reason the Intel Inside campaign continues to be unrivaled in the chip industry is that no one else can match Intel's $2.1 billion annual budget for advertising and marketing.
A P/E of 9.6 is a ridiculously low ratio for a company like Intel that will no doubt continue to dominate the semiconductor industry and likely exist as long as modern human civilization. Intel is unique in its ability to create devices for both hardware and software products. The company is in a good position given their size, influence, spending power, and they are the only company other than NVIDIA with silicon spanning from smart phones to supercomputers. Not only has Intel sustained its fundamental momentum over the years but the company has retained its ability to generate profits, as seen by its profit margin of 23%. Intel’s profits can be attributed to a highly successful marketing campaign that not only increased the awareness of the company but the awareness of the computer chip itself.
Intel’s Push into Mobile Devices
Intel, today, is associated with technology leadership, quality and reliability. These features are as important to mobile users and high-end server buyers today as they were to the desktop computer buyer in the 1990s. Over the last two years, Intel increased its ROA to an impressive 15%, which can be attributed to the revival of the Intel Inside program that reinforced Intel’s awareness of its products to customers, both business and personal. Their ROA was particularly boosted by its efforts to do a better job serving the mobile market.
Remaining true to its heritage of technology leadership, Intel recently turned things up a notch in the mobile market. "Without a doubt, my goal would be to have consumers walk into stores and have Intel Inside as a key driver of which phone or tablet they choose, just like we've done in the PC space," said Brian Fravel, Intel's head of branding. If consumers associated high-performing PCs and laptops with Intel, why can’t they do the same with mobile devices? Intel’s successful history surrounding the computer chip suggests the transition to mobile devices shouldn’t be a problem. Furthermore, the company’s presence in a recently released mobile device could be an indication that Intel is on the verge of a breakthrough in the mobile market.
Motorola, now owned by Google (GOOG), recently launched the RAZR i, which made news for being powered by an Intel processor. This was significant because most mobile phones have typically been powered by a processor manufactured by NVIDIA, whose products are mostly designed exclusively for mobile devices. Though there aren't any in-depth reviews of the RAZR i, news reports indicate that it is a pretty solid performer from a technical perspective. If the RAZR is, indeed, a solid performer as advertised, Intel is on the verge of a major breakthrough in the mobile market. Moreover, it could be putting itself in position for a successful and extensive partnership with Google.
The New War in Mobile Market
Nevertheless, as formidable as Intel is, moving from PCs to a new world of smart phones and tablets has risks. The world's top chipmaker dominates the PC market but lags smaller competitors like NVIDIA and larger competitors like Apple (AAPL) in the fast-growing mobile industry. And competition in the mobile market, overall, is fierce right now. Caris & Co. analyst Craig Ellis believes tablet computers could hurt Intel with his claim, “The rise of the iPad and other tablets is troubling for Intel, because most of those machines don't run on its microprocessors.” Intel is in the midst of an effort to break into the tablet market but given that the Apple’s iPad has become the ultimate tablet computer and the fact that Apple produces its own microprocessors, it is one of the factors that could prevent Intel from penetrating the mobile market in this area.
Long-Term Strategies towards Customer Service
Intel has begun its focus to improve the experience of consumers and the way they interact with their PCs. According to Sanjay Vora, general manager of strategic planning at Intel, the addition of features like voice, gesture and touch will improve the user’s experience of the company’s products. Recently, Intel formally announced their Perceptual Computing Initiative, a software development kit designed to enable developers to build applications that enable users to interact with computing devices via multi-modal interfaces. While having the potential to fundamentally change the way users interacts with their phones, tablets and PCs, it is also the key to Intel’s future as it soaks up high degrees of computing resources. The Perceptual Computing Initiative is a long-term initiative and we expect to see year-by-year advancements in its capability and deliverables.
Intel is also working on its customer service transition by designing devices that make consumers feel safe in an increasingly vulnerable environment brought on by the threat of hackers and cyber attacks. The company, last year, acquired security software vendor McAfee for the purpose of developing a market for security devices that protect customers. Its plan for the future is to tune McAfee’s software and Intel’s processors to work more closely together, cracking the security problems that have plagued consumers the same way it attacked high-end supercomputing problems early on. With more personal financial information going online, consumers want machines that can offer more sophisticated security. “Our strategy is 100% about creating opportunities for Intel’s silicon,” says Intel’s Renee James.
The company's strengths can be seen in multiple areas, such as its revenue growth, solid financial position with reasonable debt levels by most measures, notable return on equity, attractive valuation levels, and expanding profit margins. Its only concern pertains to whether it can successfully transition into mobile devices and how well it continues to align its products with the rapidly changing technology. But with such a strong history of excellent profit margins and high levels of return on asset, Intel represents a sound investment for savvy investor looking for that next idea that can yield high returns in the wild tech world.
Stocks Discussed: INTC, AMD, NVDA, HPQ, DELL, GOOG, AAPL,