Is Intel Obsolete?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Intel (NASDAQ: INTC) is one of those companies that truly changed the world. If you still need proof of that, remember that you're likely seeing this article on a computer powered by an Intel chip, unless you're using a smartphone or a tablet. These devices will ship 1.2 billion units by 2016, a compound annual growth rate of 20 percent. As I'll show later, these mobile manufacturers are choosing processors that aren't the traditional Intel x86 chips that dominate standard desktops and laptops. Intel's reign as king of the microchip mountain might be over soon.
The change in the market is probably why Intel cut its earnings expectations from $13.8 billion to $14.8 billion down to $13.2 billion, plus or minus $300 million.
"Relative to the prior forecast, the company is seeing customers reducing inventory in the supply chain versus the normal growth in third-quarter inventory; softness in the enterprise PC market segment; and slowing emerging market demand," the company said in a press release. In English, that means that PC makers aren't buying as many of their chips as before.
The company's sales have been on a roller coaster ride, up and down, though still quite healthy. Any other company would kill for its sales of $13.50 billion. The company posted a second quarter profit of $2.8 billion or $0.54 per diluted share.
The main reason is that tablets and smartphones are encroaching on traditional PC functions. These mobile devices have chips that are not powered by Intel, but by ARM Holdings (NASDAQ: ARMH). The ARM architecture powers both Apple's (NASDAQ: AAPL)' s mobile devices, including the iPhone and the iPad, as well as Amazon's (NASDAQ: AMZN) Kindle Fire, including the new version that was just announced. Perhaps sensing a shift in the technology market, Microsoft is releasing a version of its upcoming Windows 8 for ARM devices as well.
Apple posted a profit last year of $25.9 billion or $28.05 per share, a staggering increase of 84 percent over the last year. The iPhone and iPad accounted for 62 percent of the company's sales.
Amazon posted a profit of $631 million last year, with electronics sales making up 64 percent of the company's sales in North America. The company's profit grew by 40 percent over the previous year, not nearly as dramatic as Apple's but still very good. Amazon's 10-K didn't say how much of that was due to Kindle sales, but the fact that the company is introducing a new version says a lot about how important it thinks it is. The ARM architecture is a factor in both companies' strong growth.
The reason both Intel and AMD (NYSE: AMD), which licenses Intel's x86 architecture, have enjoyed a virtua; duopoly in the microprocessor market for desktop and laptop PCs is the economies of scale that both companies are able to employ. While it may be easy for a couple of college students to start a Web-based business out of their dorm rooms, they're not likely to be able to do the same thing forging silicon into chips.
AMD's been having a rougher time than Intel, treading water with a profit of $74 million last quarter, after nearly drowning with a loss of $579 million in the first quarter of 2012.
ARM, on the other hand, doesn't have to make its own chips. Instead, it licenses the design to other manufacturers including Intel, who then incorporate it into embedded devices. The ARM design offers good performance with lower power consumption, which makes it ideal for mobile devices. The company posted a profit of $175.06 million last year, nowhere near as close to Intel's, but it's been rising steadily over the past few years, largely thanks to the growth of mobile devices.
Intel's x86 processors are still much more powerful than ARM chips, but ARM performance is more than adequate for smartphones and tablets, and are bound to get even more powerful thanks to Moore's Law. Intel should be more than familiar with this observation that processor power doubles every 18 months: it was discovered by Gordon E. Moore, Intel's former CEO.
The ARM architecture represents an example of what Clayton Christensen calls a "disruptive innovation." While engineers and gamers may scoff at the relatively underpowered ARM, it's opened up a whole new market in mobile computing. Modern PCs are overpowered for the relatively simple tasks that normal users do, such as word processing, email and surfing the Web.
ARM will probably start to show up in desktop and laptop machines, especially since Windows 8 runs on it, coming full circle with its origin as the processor for the Acorn Archimedes computer system in the '80s. It's already turned up in servers. (I have to give a shout-out to Christian Neukirchen's excellent blog Trivium for that discovery.)
I wouldn't count Intel out yet. There will still be people who want to crunch numbers and play the latest 3D games. The company's financially healthy and should have a market for quite some time.
ddelony has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Intel. Motley Fool newsletter services recommend Amazon.com, Apple, and Intel. 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.If you have questions about this post or the Fool’s blog network, click here for information.