What Intel's Breakup with Microsoft Means to You
Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For decades, the most successful team in technology was Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC). Microsoft defined the Windows software, and Intel designed the x86 chips that software ran on. Brad Pitt and Angelina Jolie were Brangelina, Microsoft and Intel were Wintel.
But Microsoft's failure with Windows RT, the new interface introduced with Windows 8, to give it play over Christmas in tablets and phones has caused a rethink, and an important schism that will impact your investments.
Wintel is Splitsville
This was the big story of last week's Consumer Electronics Show. Samsung quietly shelved plans for a Windows RT tablet, reporters admitted that Windows RT looks doomed and – more important – Intel took control of the x86's future feature set by mandating “touch” interfaces in future laptops.
Intel has seen this trouble coming for a long time. A decade ago the firm was hiring consultants to tell it why it was having trouble selling mobile chips to Chinese OEMs. The answer then was the same as it is now – OEMs don't want parts, they want designs that sell. Freedom, to them, is just another word for nothing left to lose. The handcuffs of a reliable order flow mean more.
The best example of this is Foxconn, also known as Hon Hai Precision Industry Co. Ltd., of Taipei. It had mainly been making motherboards for Intel for over a decade, but rose to immense prominence later in the decade by subcontracting with Apple for manufacturing its iPod, iPhone and iPad. The company is now traded in London under the symbol HHPD and has a market cap of nearly $37 billion, against Intel's $108 billion.
The success of ARM Holdings in selling designs that companies like Apple could then turn into custom microprocessors is another threat. Over the last five years shares of ARMH are up 565%, while those of Intel are flat.
Intel Orders Touch
The “order” to support touch from Intel is, in my view, only the first of what will be several moves in the coming year aimed at separating the fate of INTC from that of MSFT. This will accelerate once CEO Paul Otellini makes his retirement official this summer, after his successor is chosen, and my guess is it's the key question his potential successors are being asked in their interviews for the job.
Otellini chose to retire before age 65 in order to give his company time and space to make that kind of choice. So far, all the possible candidates being mentioned are insiders, but you can bet that even an “insider” successor will have an “outsider” perspective on what needs to be done.
What will that mean for Intel shareholders? The stock currently trades at a PE of less than 10, with a dividend yielding 4.14. If Wall Street becomes convinced that Intel is serious about changing itself and taking back control over its destiny, you can easily see $30/share by the end of this year.
DanaFBlankenhorn owns shares of Intel and Microsoft. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!