The Smartphone & Tablets Wars – Will Intel Prevail?

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The battle between Intel (NASDAQ: INTC) and ARM Holdings (NASDAQ: ARMH) is likely to keep heating up in the years to follow.  For now, Intel is late in the game of microprocessors for smartphones and tablets. With over 6.1 billion chips sold in 2010, ARM Holdings controls 95% of the smartphone market. This means Intel is currently shut out from one of the fastest growing segments in the semiconductors industry. There are reports that Intel is working on smartphone processors, which could make the company a contender in this industry. The question is could Intel become a serious competitor to ARM on its home turf?

There is no need to expand on the high share Intel has in the processors markets of desktops and laptops. In 2011, Intel's market share reached 80.1%, while Advanced Micro Devices, Inc. (NYSE: AMD) carried the rest. Compared to 2010, Intel's market share in 2011 declined by 0.6 percent points.  The monopoly that Intel has in these markets helps the company reach high profits by asking high prices for its products. But not all is well for Intel.

Operational profits in the second quarter of 2012 reached $3.8 billion, which is lower by nearly 2.5% from the parallel quarter in 2011.  The economic slowdown in Europe and the U.S isn't helping the industry.

The high correlation between Intel's stock and the S&P 500 (during 2012 the linear correlation between their daily percent changes reached 0.73; the correlation with NASDAQ is slightly lower) means that the growth (or lack of it in recent years) in the U.S economy is one of the main driving forces of Intel's stock price movement. During 2012 (UPD), Intel's stock rose by nearly 5% and the S&P 500 by 6.2%. The chart below shows the developments of the company’s stock and the S&P 500 during recent years (since 2008), in which both indexes are normalized to 100 as of January 2008.

<img src="/media/images/user_12845/intel-corp-sp500-2012-july_large.jpg" />

As seen above, Intel started to outperform the S&P 500 only during the past several months. Despite the recent outperformance, its fundamental data might suggest the major threat the company is facing: The shift from laptops to tablets – a change from a market controlled by Intel to a market currently run by ARM.

In regards to the tablet market, Intel tried to respond with Ultrabooks that for now don't seem to be picking up in sales, although this data only reflects the first wave of Ultrabooks. The current phase, based on newly manufactured IvyBridge processors, might be more successful, especially when Windows 8 hits the market and it introduces touch screen technology into the newly created Ultrabooks segment. Nevertheless, even if Ultrabooks become an adequate response to the tablet threat, it won’t solve Intel’s absence from the fast growing smartphones segment. Therefore I think the only option Intel will have to return to strong growth is to become a serious player in smartphones.

Up until recently, Intel wasn't too serious about entering this market, but their direction seems to have shifted. Not long ago, Intel Introduced Zolo, the company's first “Medfiled” smartphones, and, since then, Intel already stated to investors that there are plans to introduce "Medfield" Z2580, the company's first dual-core smartphone processor later this year. This could be one giant leap the company will make towards becoming a serious competitor to ARM in the microprocessors industry.

But will Intel prevail in the smartphone market as it did in the PC market? When it comes to technology, one of the main factors for success besides being first is the amount of money you are capable of investing in R&D. A good example of that is Microsoft, which managed to overtake Netscape with Internet Explorer (just to be pushed out by Google Chrome) and Sony’s Play-Station with Xbox.

These factors aren't a guarantee for success but are still very important. One must remember that Intel is a much bigger company than ARM, with a market cap of $127 billion compared to ARM's $9.77 billion. Intel can afford to make mistakes; it can even afford to fail once, twice, or three times. ARM, on the other hand, can’t afford to fail at all.

Intel also has connections with the major companies that purchase its products, such as Apple (NASDAQ: AAPL). For years, Apple bought processors from Intel for its computers, and if the company will switch sides, ARM could lose a large portion of its revenue base.

ARM's advantages in pricing and power efficiency could dissipate as Intel introduces next generation chips.

Intel continues to lose market share in the processors markets, it suffers from the economic slowdown in the leading economies, and it is losing costumers that trade laptops for tablets. Despite all these short term negative factors, Intel is still much bigger and has a lot more resources to allocate towards producing microprocessors than ARM has. Intel also has the connections to enter this market; therefore, it could be just a matter of time before the company starts taking market share from ARM. This process could lead to a price war, and if that happens, the company left standing is the one with the deeper pockets.

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liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services recommend 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.

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