This Company’s Still Way Off The Mark

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

The more I think about Santa Clara, Calif.-based Intel (NASDAQ: INTC), the more I can’t help feeling truly pessimistic about the company. This organization is truly running a marathon, but in the world of technology, where even smaller rivals are sprinting ahead in the race, Intel’s efforts might be too slow to produce results.

The news that Altera, a market heavyweight that designs chips for phone-networking equipment, is now an Intel customer marks a good step ahead on the road to recovery. But Intel still has way too much catching up to do.

Intel had already clarified its plans to manufacture chips for other customers way back in 2010. However, Altera is the only large, significant customer announced since then. And the Altera agreement has been drawn up in such a way that Intel can’t even recruit any more big customers for the next 12 years.

Some of you may say that given its huge cash stockpile, Intel doesn’t need to find any new buyers. But maintaining fabrication plants -- aka fabs -- or foundries on its own may be a strain on Intel in the near future. After all, fabs have huge maintenance costs, and they need customers to offset that concern. That's why Intel investors have every right to feel worried.

What makes Qualcomm clever

The high cost of running fabs is the primary reason why smaller rivals such as Qualcomm (NASDAQ: QCOM) buy chips from contract manufacturers such as Taiwan Semiconductor Manufacturing (TSMC). Qualcomm is a formidable competitor, with customers like Apple and Samsung on its books.

Qualcomm currently dominates the mobile processor market; its customers encompass 90% of the world’s handset manufacturers . That places Qualcomm in a win-win situation, as it leverages its popularity in more ways than one. On one hand, Qualcomm is banking on the huge 3G penetration gap and the consequent need for 3G-enabled smartphones in emerging nations. On the other, it knows it can cash in on the expected wave of handsets to support the next-generation 4G Long Term Evolution (LTE) technology in the US and other developed nations. And Qualcomm doesn’t even have to worry about maintaining its own fabs.

Still a long way to go

Qualcomm’s already there in the field of LTE, while Intel’s still a relative newbie. The latter’s global share of the handset chip market still stands at less than 1%, as per data from research firm Strategy Analytics.

True, Intel's newly launched Clover Trail+ processor is a good proposition for phone and tablet makers, given its stunning graphics capabilities and low power consumption -- the latter being an area Intel hasn’t been traditionally good at. But that still doesn’t discount the fact that Clover Trail+'s LTE capability comes in the form of an optional add-on modem only. Intel’s failure to provide an integrated LTE solution might make it lose out to similar integrated options, such as the upcoming Snapdragon 800 processors from Qualcomm or the Tegra 4i range from peer NVIDIA.

Furthermore, an integrated LTE solution draws less power as well. And Clover Trail+ processors will not find their way into mobile devices anytime before the end of this year. I’m sure Intel's rivals won't be sitting still in the meantime.

ARM’s ‘army’ marches on

And that’s not the end of Intel’s worries. Qualcomm and NVIDIA are all part of a growing group of chip manufacturers that depend on UK-based ARM Holdings (NASDAQ: ARMH) for their chip designs – Intel’s real nemesis in this market.

As I have already mentioned before, the cost factor is the single greatest reason why Intel has consistently lost out to ARM. Processors made by ARM can found in 9 out of 10 smartphones in the world, simply because it does not manufacture them at all! ARM just licenses its designs to a host of chip makers like Qualcomm, NVIDIA, and Texas Instruments, who, in turn, contract with foundries like TSMC to manufacture them. That royalty-based model is really hard to beat. Combine that with the traditional ‘low power, high efficiency’ image that is reflected in ARM-designed chips, and you know Intel’s in a real tight spot.

But mobile processors do not comprise the only area where ARM is scoring over Intel. The field of embedded processing, which is essentially the process of chip manufacturing for a range of devices other than mobile phones, such as cars and even cutlery, has yielded to ARM’s dominance. Its embedded chip market share rose to 60% in 2012, a figure slated to go up to 68% in 2016, according to research firm IDC. Intel’s share of the embedded chip market may go up from a meager 2% in 2012 to a disappointing 5% in 2016, as per IDC. Think about that!

Not exactly a bright scenario

The chips are definitely down for Intel, and its future prospects look bleak. The company has recently revealed its intentions to launch web-based TV services, complete with a set-top box. But its success as a virtual cable operator in an unexplored market where it has zero experience remains to be seen. The typically high expenses associated with TV programming channels, in addition to issues with Internet bandwidth, may not help, either. In that cutthroat world, Intel’s reputation as the dominant chip maker for PCs may not be impressive enough for the market.

While I do agree that Intel’s gearing up to make the transition into the post-PC era, the competition’s so well ahead that there just may not be enough time on its hands.  Intel’s efforts at a faster product design cycle needs to be effectively complemented by a faster turnaround time for these products to actually show up in smartphones and tablets manufactured by the market biggies. Intel desperately needs that recognition.

At the same time, smart investors would do well to keep an eye open for the company’s activities in the low-end smartphone segment in the emerging markets of Asia and Latin America, where its new ‘Lexington’ range of chipsets should hold it in good stead. I would hold on to this stock for now, just to give this otherwise cash-rich company some more time. But if things don’t move much for Intel over the next couple of quarters, it may be time for a rethink.

subhadeeptech has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. 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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