The Top Threats Facing This Industry Behemoth

Alvin 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 a strong company and, overall, it is a great investment. The company’s strengths are examined in two previous writings: Mobile vs Desktop and Buy Intel. However, it is also important to examine the current and potential threats to Intel. Knowing the challenges a company faces, allows investors to make more informed decisions and, as a result, lowers investment risk.

Currently, one of the biggest threats to Intel is declining PC sales. Intel relies heavily on PC sales. In the year 2011 and Q3 2012, its PC Client Group accounted for 66% and 64% of the company’s total net revenue, respectively. In Q3 2012, Intel reported a decline in revenue of 8% year over year in its PC Client Group. Furthermore, in the quarter, the company reported a drop in desktop platform volume of 6% year over year. For the first nine months of year 2012, desktop platform volume declined by 3% year over year. The following table shows worldwide PC shipments for the last three quarters (IDC).

<table> <tbody> <tr> <td>PC Shipments</td> <td>Q3 2012</td> <td>Q2 2012</td> <td>Q1 2012</td> </tr> <tr> <td>Unit Shipments (Thousands)</td> <td>87,795</td> <td>86,731</td> <td>87,111</td> </tr> <tr> <td>Year Over Year Growth (%)</td> <td>-8.6</td> <td>-0.1</td> <td>2.3</td> </tr> </tbody> </table>

As shown, the industry went from growth in the first quarter to declines in the following quarters, including the 8.6% decline in the third quarter. Additionally, Q3 PC shipments in the US declined by 12.4%. If PC sales stay stagnant, this would be crippling to Intel’s growth. Yes, part of the decline can be attributed to the clearing of inventory prior to the launch of Microsoft’s (NASDAQ: MSFT) Windows 8 and the current state of the global economy. However, at least part of the decline is due to the rise of mobile devices. In Q3 2012, smartphone shipments increased by 46.4% year over year to a whopping 181.1 million units. Similarly, in Q3 2012, tablet shipments increased by 49.5% year over year to 27.8 million units (IDC).

Currently, Windows is the dominant OS in desktop PCs with a market share of 92% (netmarketshare). For many years, the Windows and Intel duo, aka Wintel, dominated the computing world. However, Wintel (so far) has failed to gain strong traction in mobile devices. The tablet and smartphone markets are dominated by iOS and Android. For the smartphone and tablet markets, Windows has a market share of less than 1%. ARM Holdings (NASDAQ: ARMH) has taken advantage of Intel's problem and currently controls 95% of the smartphone market.

This leads to a looming threat to Intel. Recently, ARM announced the launch of its 64 bit Cortex-A50 series designs. This opens a new world for ARM processors. While microprocessors based on ARM’s 64 bit designs will likely launch in 2014, 64 bit ARM processors are a threat to Intel’s server market (possibly desktop market). Already, Advanced Micro Devices (NYSE: AMD) is planning on launching, in 2014, server chips based on ARM architecture. In a company press release, AMD stated, “AMD’s new design initiative addresses the growing demand to deliver better performance-per-watt for dense cloud computing solutions. Just as AMD introduced the industry’s first mainstream 64-bit x86 server solution with the AMD Opteron processor in 2003, AMD will be the only processor provider bridging the x86 and 64-bit ARM ecosystems to enable new levels of flexibility and drive optimal performance and power-efficiency for a range of enterprise workloads.” While it remains to be seen how well this design will work, it will increase competition. AMD has long been Intel’s rival in desktops and servers and the Cortex A50 series designs just added more weapons to AMD’s arsenal.

Moreover, since ARM licenses its architecture, there are a lot of other Intel competitors. The biggest dark horse in this area is Nvidia (NASDAQ: NVDA) and its “Project Denver.” Nvidia is already a big rival of Intel in the GPU market and the company is now building its own CPU using the ARM instruction set. On Nvidia’s blog, the company states, “NVIDIA’s project Denver will usher in a new era for computing by extending the performance range of the ARM instruction-set architecture, enabling the ARM architecture to cover a larger portion of the computing space.  Coupled with a NVIDIA GPU, it will provide the heterogeneous computing platform of the future by combining a standard architecture with awesome performance and energy efficiency...Project Denver extends the range of ARM systems upward to PCs, data center servers, and supercomputers.” It is a bold goal. However, Nvidia is a company that should not be underestimated.

Lastly, Intel’s entry into the tablet market could be stifled by Windows RT. Windows RT is a version of Windows 8 that is designed to run on ARM processors. For example, Microsoft’s Windows RT Surface tablet runs on an Nvidia Tegra SoC, which uses an ARM CPU. Windows RT tablets compete with x86 Windows 8 tablets. Additionally, while this is purely speculative, ARM’s small foothold in Windows could expand in future versions of Windows. ARM’s 64 bit leap adds to that possibility.

Overall, Intel faces many current and potential threats. Intel faces declining PC sales, mobile devices, 64 bit ARM processors, AMD ARM servers, Nvidia’s CPU, and Windows RT. It should be noted that this is not a comprehensive list. While Intel is a very strong company, there are serious threats to the company. By studying these threats, investors gain better understanding of the overall company. This increase in understanding lowers risk.

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Alvin owns shares of Microsoft and Intel. The Motley Fool owns shares of Intel, Microsoft, and NVIDIA. Motley Fool newsletter services recommend ARM Holdings, Intel, Microsoft, and NVIDIA. 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.

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