Intel's Not Inside
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Intel’s (NASDAQ: INTC) chips power roughly 80% of traditional computers. Intel also enjoys a rare place at Apple’s (NASDAQ: AAPL) table, for years now Intel has been the sole provider of processors for Apple’s laptops and desktops. Thus Intel is often seen as a bellwether for the entire technology industry, and sometimes the economy at-large. With the US economy in a very slow recovery, Europe sliding back into recession and the phenomenal growth in Asia slowing somewhat, Intel’s earnings this quarter were highly anticipated. Intel is also not a player in the tablet or smartphone market, where their rival ARM's (NASDAQ: ARMH) chips rule supreme.
Intel’s total second quarter revenue was $13.5 billion dollars, just under the consensus estimate. Intel netted $2.8 billion dollars in quarterly profit, just above what had been estimated. Revenue for the second quarter was up 4% year over year and up 5% from the previous quarter. However Intel’s $2.8 billion dollar profit was a drop of 4% year over year. Intel also lowered their revenue projection for the rest of the year from “high single digits” to 3-5%. The data center group which makes chips for servers was the star of the second quarter earnings report with 15% year over year revenue growth.
Their PC division had 4% revenue growth, for a total of $8.7 billion ,the majority of Intel’s revenue. Their third business group which includes chipsets with other architectures shrank to just over $1 billion. Gartner recently reported that they expect traditional PC sales to be flat to slightly down this year so it is not shocking that Intel’s PC division is not seeing strong growth. In fact one of Intel’s competitors, AMD, projected on July 9th that their revenue to be down 11% in the second quarter from first quarter.
PC based revenue growth will continue to be weak for Intel going forward, the more interesting growth potential for Intel is in mobile. Mobile is more than tablets and smartphone, for Intel mobile starts with Ultrabooks. These are lightweight, yet powerful laptops that were designed by Intel and are running on Intel chips. Intel’s CEO has stated that Ultrabooks continue to pick up steam and that they had hit their sales volume targets for the first half of 2012.
Intel is now tracking 140 Ultrabooks currently being designed and stated that they are “very pleased with the level of innovation and invention being brought into this category.” Intel should also be happy because their chips are running on the laptop that the Ultrabook standard was designed to compete with, the Macbook Air. This means that Intel is profiting from both sides of the competition. Despite Intel’s rosy report on Ultrabooks, IDC and Gartner recently stated that Ultrabooks have not made much of an impact on the PC market and are not selling very well. It is possible that Ultrabooks will take off when the price of an Ultrabook drops to around $700 as Intel expects it will. Then maybe Ultrabooks will hit 40% penetration in the PC laptop market, as Intel also expects will happen by years end. However these predictions are overly optimistic considering the slowing PC market and continued high price of Ultrabooks.
Despite Intel’s domination in personal computers and the growth in the server business they have been completely blindsided by smartphone and tablet growth. They have essentially been a non-player in both the tablet and smartphone market, where almost all chips are designed by ARM and made by the likes of Nvidia, Samsung, TI and Qualcomm. There are over 400 million Android devices and virtually none of them have Intel inside. Additionally Windows Phone is trying to make a name for themselves and Blackberry is hanging in there, both lack Intel phones.
As Google’s (NASDAQ: GOOG) dominance with Android continues Intel is trying to finally succeed in smartphones with their Medfield Atom chip. This is a mobile chip that will be running on Android smartphones and a few models have actually launched. Intel has a steep road to climb with smartphones, Apple is not going to use an Intel chip in the iPhone, Blackberry and Windows Phone are also not looking to Intel. This limits Intel to Android which already has excellent non-Intel chipsets. Additionally early partners for Intel powered Android smartphones are not top tier smartphone makers they are the likes of Lenovo and Lava.
Intel’s place in the tablet market is even less attractive than their position within smartphones. Tablet sales are on track to hit nearly 120 million this year according to Gartner and will be above 300 million annually in a few years. Apple’s iPad runs on an in house ARM based chipset, Google’s new Nexus 7 runs an Nvidia designed ARM chipset and virtually all other Android partners are using ARM. There was a Lenovo built Android tablet shown off earlier this year scheduled for release with an Intel processor right about now but that has not come to pass.
A bright spot for Intel with tablets is that one of the two Microsoft (NASDAQ: MSFT) Surface tablets that Microsoft announced in June will have an Intel processor. This surface tablet will be running Windows 8 and will be launch roughly three months after Windows 8 launches, Windows 8 will launch on October 26th. Intel claims that there are 20 Intel based Windows tablets being designed that they are monitoring for release later this year or early next year.
This was a pretty average quarter for Intel, nothing was drastically bad and nothing was phenomenally good. The future for Intel rides on their ability to break into the mobile market and the success of Windows 8. Through Windows 8 tablets Intel should get a boost with and the launch of Windows 8 should boost traditional PC sales. It remains to be seen whether Intel can get a substantial foothold with Android smartphones and tablets but it’s pretty late in the game to start playing.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Google, 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.If you have questions about this post or the Fool’s blog network, click here for information.