Intel-IGiant Design

By Peter Pham - May 7, 2012 | Tickers: AAPL, INTC, MSFT | 0 Comments

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When we talk tech we can’t help talk about Intel (NASDAQ: INTC).  Like Apple (NASDAQ: AAPL) they are one of the elephants one has to navigate around when thinking about how things are changing.  Moreover, what their business is doing is telling us the truth behind the government statistics which are of dubious quality on both sides of the Pacific. 

With the rise of the smartphone and the table, the forward thinkers want to declare this the Post-PC world.  For a number of little tasks, and some larger ones, yes, the tablet and/or smartphone can replace a person’s PC or laptop, of that there is no doubt.  Processors and memory have risen via Moore’s law to the point where the applications we do our work in consume a pittance of the computer’s power, unless we are graphic artists, engineers or animators. 

For us mere mortals, however, writing blogs or creating spreadsheets and presentations of the specialized work created by those engineers or artists, most of our clock cycles are taken up by the interface itself and browser.  When the day comes that we can truly do on a tablet all of the things that a PC can do, I’ll be willing to consider the PC a dead letter.

Until then, Intel’s revenue and earnings tell a completely different story.

Stunning Asian Growth

Since the first quarter of 2010 Intel’s revenues in the Asia/Pacific region have risen from $5.89 billion to a peak of $8.05 billion in 3^rd quarter 2011, but have settled back due to a number of natural disasters to $7.37 billion in the 1^st quarter of 2012.  These all represent around 57% of total revenues.  That is 12.5% CAGR of top-line revenue in the fastest growing region in the world without having a processor that powers the devices in the fastest growing market segment, tablets and smartphones.

Yes, Apple may ship more mobile processors this year than Intel.  Yes, ARM owns the Android market, but the PC is still shipping in increasing quantities to the markets that are growing as opposed to the U.S. which is most obviously not.  PC sales in the U.S. dropped in 2011 for the first time since the recession of 2002.  In the Asia-Pacific market, PC sales grew at 19% in 2010 and 11% in 2011.  The U.S. market contracted nearly 6% in the 4^th quarter of 2011 according to Gartner, while the Asia-Pacific demand accelerated 8.5%, but was slower than estimates. 

With the tightening of credit in China and Vietnam finally taking full effect on those economies’ real estate and banking sectors, it is not surprising to see a dip in PC sales.  If one believes in the hard landing thesis for China, which I don’t, then you would believe that Intel’s medium term prospects for growth are limited at best.

However, the changes to the Yuan’s trading structure, equity market liberalization, and greater invitation for direct foreign investment in the Yuan signal to me that China is confident that they can meaningfully shift their economy to a domestic demand driven one as opposed to a purely export driven one.

In Vietnam, which will see slightly lower GDP growth this year as the after-effects of bursting their credit bubble are worked through, Intel is banking on supplying the future Southeast Asian middle class, set to quintuple over the next 20 years to a nearly unfathomable 3 billion people by building their largest chip plant in Ho Chi Minh City in the 4^th quarter of 2010.

The Mobile Conundrum

The big hole in Intel’s portfolio of products is not having a presence in rapidly evolving mobile processing space with Apple and ARM powering all of those smartphones and iPads running iOS and Android.  Intel’s response has been to develop a mobile solution to compete with the highly successful MacBook Air, the Ultrabooks.   The new IvyBridge line of processors will likely power the new MacBook lineup when they finally ship but they won’t be ready until the 3^rd quarter.

For Intel, though, the near future in mobile computing is their Ultrabooks and variations thereof, whose sales have exceeded expectations by a considerable margin.  Dell announced recently that sales of them have more than doubled their initial expectations, selling them preferentially to their enterprise customers, which has become the focus of Dell’s business.  While Dell lost sight of the fact that they were a service company that sold PC’s to businesses, Intel never got sidetracked with what they did best, processors and chipsets. 

Windows to the Soul

That said though, Intel’s strategy is multi-focal.  Their Atom processors will power Microsoft’s (NASDAQ: MSFT) Windows 8 tablets that are due later in the year with the new OS.  Many of the designs that have been released so far have been hybrid tablet/laptops which have a slide out keyboard, further attempting to blur the line between the full service computer and a mobile device.  The challenge for Intel is delivering in 2013 on their 22nm Atom processors which should compete with ARM in performance at price points that are competitive with the iPad and other tablet combinations running Google’s Android. 

All of this will play out in an environment where Apple is seeing excellent growth, i.e. China.  Whether Windows 8 will be able to truly merge the desktop and mobile OS into a seamless user platform will be the key to Intel’s ability to pull market share for their processors from ARM or Apple. 

I’m not sold on Android as the end-all, be-all alternative to Apple’s offerings.  Android vs. iOS is a similar argument to PC vs. Mac for all of these years.  Apple’s products have a feel about them that Android doesn’t have which inspires brand loyalty.  Asians are very brand conscious and very brand loyal.  If Android cannot make people fall in love with it and if Windows 8’s Metro UI can work its way into the hearts of the bit-twiddlers, then a lot of the bloom comes off the Android rose which opens up a major opportunity for both Intel and Microsoft to build far more market share than a lot of people are giving them credit for right now.

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