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PCs Are So Yesterday

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The significant slump in the sale of personal computers is seriously chipping away at Intel’s (NASDAQ: INTC) profits.

The world’s leading maker of semiconductors, which grew by leaps and bounds by supplying chips to computer makers around the globe, now has a chip on its shoulder: personal computer chips.  The Santa Clara-based company recently reported fourth quarter earnings of $2.5 billion, or 48 cents a share. That was 27% lower than Intel saw in the same quarter a year earlier. Revenue slipped 3% to $13.5 billion from $13.9 billion.

Weighing on the chip maker was the slumping personal computer (PC) market, which declined some 3.5% last year. Intel earns 64% of its revenue from PC chips.

But, PCs are so yesterday.

Smartphones and tablets are currently where it’s at, and where Intel isn’t, at the moment.

However, it is exactly where ARM Holdings (NASDAQ: ARMH) is at. The U.K. company designs computer chips and licenses its designs to chipmaker and other companies like Apple (NASDAQ: AAPL). ARM Holdings has enjoyed a nice long and steady run of late, buoyed by the explosive growth at Apple thanks to Apple’s hugely successful iPhones and Ipads.

But before you rush into ARM Holdings, cautionary red flags have been waving for awhile over concerns of slowing iPhone sales. Reports that Apple has cut component orders for its latest iPhone5 amid sluggish sales have deeply cut into Apple's share price. The tech behemoth’s shares have tumbled 29% from their high of $705 and change, which was hit on Sept. 19, 2012, to around $500. While a bevy of analyts now call shares of Apple cheap, citing its cache of cash, with $121 billion at the end of 2012 and a debt free balance sheet, at $500 a share, not too many can afford to own Apple.

A lackluster iPhone5 consumer response has also been pulling ARM Holdings lower. Shares recently hit a lofty $41.85 a share, a level not seen since March 2000. Yet bearish put option activity for near month contracts has far surpassed bullish call activity over the last several weeks, suggesting a near term pullback is looming.  Also weighing on ARM Holdings is Intel’s aggressive foray into the booming smartphone market.

Intel just showed off its new Atom processor platform at the Las Vegas Consumer Electronic Show. The new platform is directly aimed at the fast growing market for low-end smartphones in developing countries.  This not only allows Intel to get its feet wet in this hot market, but by targeting the low end it also gives Intel a presence in a market with the greatest potential for growth in the mobile sector over the next few years. Consumers in developing countries are clamoring for a low-cost, full feature smartphone that can deliver first-rate performance.

Total smartphones shipments for all of 2012 are estimated to have totaled between 600 million and 700 million units, and they are still deemed a “pricey” item in most of the world. With the global population approaching 7 billion, should Intel have a hand in turning out a first-class and dependable smarthphone at an affordable price, it stands to be handsomely rewarded by a cache of cost conscious consumers. Owning Intel is a less expensive way to bet on the low cost smartphone segment than owning Apple, which is also mulling a low cost smartphone.

Moving into the lower-end segment is a big change for Intel, which has always prided itself on supplying the most advanced chips. But Intel appears to have recognized that if it doesn’t change direction, it may just end up where it’s heading, which at present isn’t the best place to be.

 


DianeAlter has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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