Can Intel Be Kept at ARM's Length
Muhammad 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) shares have taken a tumble recently. Their third quarter revenue warning did them no favors as the stock was beaten down afterwards. Here's why I think this is an excellent opportunity to buy into a stock with relatively low risk and potentially high return for intermediate term investors:
The company is on relatively strong footing fundamentally, has a very low multiple for a tech company and steady dividend growth. What I find most frustrating is that they have all the resources necessary to lead the mobile processor revolution, but none of the contracts. Let's take a closer look at how Intel intends to finally break into mobile and wrestle market share away from Qualcomm (NASDAQ: QCOM) and ARM Holdings (NASDAQ: ARMH).
Intel has had steady dividend growth and is currently trading at about 10 times earnings.
Your notebook and desktop most likely run on x86 architecture. Until recently, no one has been able to get an x86 processor to work properly inside a smartphone style system-on-chip design. Most smartphones are running on ARM processors and it is assumed that the software written for them will simply not work with Intel's x86 instruction set. As long as Intel processors require further adaptation they are no longer a competitive option and will be shunned by smartphone and tablet makers.
The good news for Intel is that the compatibility issues with pre-existing software written for industry standard ARM processors are over. Intel's “Medfield” processors are successfully employing x86 based processors in smartphone installations designed for ARM processors without compatibility issues. In short, smartphone makers that were limited to purchasing ARM processors now have Intel chips as an option.
Google’s (NASDAQ: GOOG) Android mobile platform will continue to beat Apple's iOS in terms of market share for as long as they can offer a wider variety of feature rich devices for low prices that keep getting lower. Perhaps that's why Google's developers recently partnered with Intel's impressive software team to hammer out compatibility issues. The results were the successful porting of the Android operating system to the x86 instruction set while still maintaining compatibility with existing applications. Test results show that the Intel processors will be able to slip into an Andriod phone or tablet anywhere an ARM chip could go. Bringing Intel into the fold to compete with ARM should drive the prices of Android devices even lower. This is good news for Google and great news for Intel shareholders.
The next step for Intel's mobile penetration plan is to dispel the myth that their Atom processors are less efficient and slower than existing technology. In a test conducted by Anandtech, Intel's single core “Medfield” pro at 1.6 GHz beat the dual core ARM Cortex A9 by a wide margin performing tasks that require a single core. When tested completing processes requiring multiple cores the Intel chip still came out ahead of ARM. On top of performing tasks as faster or better than the industry standard ARM processors, the Intel chips do so using roughly the same amount of power.
Single core Intel Medfield chips are still measuring up to competing dual cores while maintaining energy efficiency.
Further testing with the quad-core Snapdragon S4 processors by Qualcomm showed that they perform only slightly better than the single core processor from Intel. Intel has a higher performance Medfield chip slated for early next year that sports dual cores and LTE capability. Intel's new chips should outperform both ARM and Qualcomm processors. More importantly the Intel chips will be able to not only outperform ARM and Qualcomm chips, but do it using just as little power from those tiny smartphone batteries.
Also, Intel has a distinct advantage over ARM with respect to getting their new products to market. The ARM Cortex A9 design was completed three years before you could buy a phone that was using it. Intel has ARM clearly beaten in this arena. Intel's instruction set programming and core architecture development can be done internally. This is not the case with ARM Holdings. Also Intel doesn't have to collaborate with an outside manufacturer once their chip designs are finalized, they've got the most advanced processor factories on the planet. ARM, on the other hand, relies on outside manufacturing from sources like Taiwan Semiconductor and United Microelectronics to produce their chips.
Normally, I wouldn't get too excited about a competitor playing catch up until they've fully caught up, but this is the Intel Corporation. They don't have to convince manufacturers that they can deliver quality and lots of it, they've been doing so forever. Even if their chips equal ARM and Qualcomm’s with respect to efficiency, speed and price I can see big players like Samsung (SSNLF) and Nokia signing with Intel because having “Intel Inside” is a selling point they won't get from other chip-makers. Most people think Texas Instruments makes nothing but calculators.
Just try marketing a phone with an ARM Holdings or Texas Instruments logo.
Intel's earnings per share has been stuck around 10 for a few years now as desktop and notebook sales stagnate in the wake of tremendous growth in mobile tech markets. Although Intel has arrived late to the game, it is no secret that they are concentrating their efforts to find a way into our smartphones and tablets.
I recommend a long position in Intel hedged with October put contracts. Intel has already warned against lower than expected earnings in October and its shares reflect that. If their earnings statement includes positive news of penetrating the mobile market Intel’s share price should soar. You can let the put contracts expire, set a comfortable trailing stop and lock in significant long term profits. On the other hand, if Intel announces no positive movement into mobile and share prices tank, then the in-the-money put contracts plus a $0.22 per share dividend payout will cover most of the cost of the trade. This is a low risk opportunity with huge upside potential, just the sort of opportunity smart investors need to jump on.
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muhammadbazil owns shares of Google. The Motley Fool owns shares of Apple, Google, Intel, and Qualcomm. Motley Fool newsletter services recommend Apple, Google, 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.