It's been a frustrating stock to hold, particularly as revenue growth remains elusive and profitability continues to decline. With that in mind, the decline in profitability is driven principally by Intel's very large investment in mobile (that, admittedly, came on a bit late), and the lack of revenue growth has been entirely due to secular concerns (PC TAM is declining) rather than poor execution within Intel's core businesses.
That being said, for all of its warts and faults, I do believe that Intel will eventually emerge as either the #1 or #2 player in system-on-chip products intended for mobile computing. While the company's products today aren't the perfect products for their segments, Intel has been rapidly closing the gap with its competitors in many key areas. In particular, I believe the following hold true:
- Intel, with its XMM 7260 modem, is second only to Qualcomm (QCOM) when it comes to high-end LTE-Advanced modems. In fact, I believe Intel will beat Qualcomm to market with a category 6 LTE-Advanced modem, which is - frankly - extremely impressive.
- Intel's low power CPU core, known as "Silvermont", is the industry's most efficient CPU core, despite claims from Intel bears that "x86 can't do low power". I expect Intel to continue to design the best mobile CPU cores going forward on a performance/watt basis.
- Intel still controls the world's best semiconductor manufacturing technology, which - once Intel gets its SoC designs and attendant IPs in order - will prove to be a key differentiating asset.
- Intel has the world's 9th most valuable brand, behind only Samsung. When Intel has the right products for mobile, this will prove a key marketing asset that will lead OEMs to want to rally behind the Intel name to differentiate themselves in a crowded market.
- The market is hungry for a strong #2 alternative to Qualcomm, and Intel is the most likely candidate to have the stamina to keep playing in this game long term.
So, Intel Missed Mobile Wave #1: So What?
When people say that Intel "missed mobile", I'm not entirely sure what they mean. Are they saying that smartphones and tablets will no longer be sold thus there will be no opportunity for Intel to fight for share? Or do they simply believe that because Qualcomm controls the majority of the mobile apps processor sockets today that in the future there will be no way for Intel to displace Qualcomm?
If Intel didn't have some of the real structural advantages that are mentioned (in particular, the manufacturing lead), then I might be inclined to agree, but the fact that Intel has the technical assets that it does as well as the marketing/mind-share/brand that it does, leads me to believe that not only could Intel easily be the long-term #2 to Qualcomm, but that Intel could eventually have the top spot.
Now, this fight obviously won't be easy - it'll be an ugly one during which a lot of consolidation and heart-breaking happens. There is no room for more than 2-3 suppliers into the mainstream mass market smartphone/tablet space, and it's tough to imagine that Intel - assuming it can put the right products out - can't do very well in this business. Intel's latest chip launches, Merrifield/Moorefield/Bay Trail aren't quite enough to really lure OEMs away from Qualcomm's processors, but I expect that at by mid/late 2015 and into 2016, Intel's product portfolio will be incredibly formidable and the share gains can begin in earnest then.
Does This Make Intel A Fabulous Stock? Well, Not Necessarily
So, I hate to caveat this seemingly optimistic and feel-good story with this, but the fact is that tablets/phones continue to be the "hot" and "sexy" items and Intel's core, $33 billion PC market, continues to be...well, on the downslope.
As I've talked about in previous articles, the mobile apps processor market amounts to about $23B total today with growth in the 20-30% range over the next couple of years. It's a big market, but you have to remember that unless the PC market shows signs of a hard, secular bottom (and not just a cyclical prop-up due to Windows XP refresh), the mobile opportunity will be viewed as cannibalistic rather than incremental - and the stock, unfortunately, will not see a meaningful uptick.
But if the PC market does recover, and if Intel is successful in helping to drive wallet share back to the PC (in which it is selling higher ASP products in an environment with minimal competition), then you end up with a business that really looks fantastic. A $33B business that's growing low single digits, an $11.5B datacenter business growing 10-15%, and a $6-8B business growing 20-30% really does have the makings of a stock that could appreciate rather meaningfully from today's $24.50 level. But, if the PC market isn't so great, then it gets trickier to model it (and of course the upside isn't as nice).
Conclusion
The Q4 datapoint in which PCs actually grew was extremely encouraging, but one point does not define a trend. If Intel shows multiple quarters of outperformance on the PC side of things, then there really is no more bear case and the shares will finally be able to run wild like the rest of the market seems to have over the last few years. However, it's that "if" that keeps a lid on the stock price, and really, doing well in mobile today would have helped but the pain of the weakening PC market would still be very real and very much reflected in the company's stock price.
