Chipzilla Wakes and Intel Wants into Your Smartphone
It has been a tough year for Intel (INTC). The stock price peaked at $29.18 on May 2, 2012 and slowly fell to $19.36 on November 21, 2012. Recently it has lifted a little bit and is now trading around $21.50. This is a pretty dismal stock performance over 2012 especially when you compare it to its competitors. Arm Holdings (ARMH) gained about 56%, Qualcomm (QCOM) stock price was basically flat, and Nvidia (NVDA) is down 12 % for the year-- which clearly beats Intel's stock performance.
The stock price fits the sentiment for Intel as well, you hear a lot about how Intel missed the boat on mobile. I believe in Intel and even I am forced to admit Intel didn't move into this market as quickly as it should have. The market believes the PC market is mature and sales will be stagnant-- if not negative-- in the future, with the growth really happening in the mobile market. These beliefs are reflected in the Price/Earnings multiples for each company; INTC 10.16, NVDA 14.16, QCOM 19.98, and ARMH 80.96.
I believe this creates a great opportunity to invest in INTC while its stock price is suppressed and catch the rising stock price as Chipzilla starts eating market share in the smartphone market. If Intel can get a strong foothold in smartphones and increase its earnings growth, Intel may see a multiple expansion as well as it earns the market's trust that it can dominate mobile. In the next several paragraphs I will outline how INTC is competing in the smartphone market and how that market share expansion will result in increased earnings for this semiconductor powerhouse.
First, we need to look at the overall size of the smartphone market. According to the International Data Corporation (IDC) the worldwide smartphone market consisted of 712.6 million units in 2012 and grew an astounding 44% over 2011 sales. The chart below highlights the top 5 smartphone companies for 2012.
Top Five Smartphone Vendors, Shipments, and Market Share Calendar Year 2012 (Units in Millions)
2012 Unit Shipments
2012 Market Share
2011 Unit Shipments
2011 Market Share
Year over Year Change
1. Samsung (SSNLF.PK)
2. Apple (AAPL)
3. Nokia (NOK)
5. Research In Motion (now BlackBerry BBRY)
Source: IDC Worldwide Mobile Phone Tracker, January 24, 2013
The "Other" category in this chart is rather large, consisting of a third of the total market. While this category is not clearly delineated in this chart, IDC does state in the 4th quarter of 2012 Huawei, Sony (ADR) (SNE), and ZTE grew their unit sales to 10.8, 9.8, 9.5 million units respectively. This type of growth will lead to Huawei, Sony, or ZTE possibly being one of the top 5 smartphone companies in 2013 and presumably makes up a large portion of the "Other" category in the above chart. If we assume 4th quarter sales was half of these three companies sales, to account for the terrific growth in that last quarter, that would mean approximately 60 million of the 260 million units in the other category were their sales. If that is correct we have accounted for about 70% of the market.
Clearly there is an assumption in the sales of Huawei, Sony, and ZTE for 2012 but the rate of growth in the fourth quarter means they will be a major player in the smartphone space for 2013 and worth including in this discussion. ZTE focused on the low-end smartphones in emerging countries, Sony expanded its offerings in the high-end smartphone market and saw strong results, and Huawei created some innovative software features and produced both the thinnest smartphone and the first smartphone with a 6.1 inch screen. So that is the market for smartphones, 700 million units that grew by over 40% in a year is a large market. IDC also expects a total of 919 million units to be sold in 2013.
A universe of 919 million units is substantial and could have a material impact on INTC's bottom line if it can captured a significant portion of the market share. My estimates would put this market size at about 15 billion in CPU chip revenue, and this market is still growing at a fast clip. So let's look at what kind of design wins INTC currently has to try to determine how much of the market it will command in 2013. ZTE has grown sales tremendously in the last quarter of 2012 and is doing so with its flag-ship device, ZTE Grand X IN, and has announced at the Mobile World Congress the manufacturing agreement with INTC to utilize the new Atom Z2580 processor.
ZTE also is focusing on the low-cost smartphone market for emerging countries, where the greatest growth is expected. INTC is well positioned to benefit from ZTE's growth and the growth of the low-end market. It appears based on the IDC report that ZTE could possible capture approximately 5% of the smartphone market for 2013 which would translate into 46 million devices with Atom processors inside. Intel also won the Ascend Mate device from Huawei but misses out to QCOM on some of Huawei's other devices. Huawei, much like ZTE, could capture 5% of the smartphone market in 2013 based on IDC's report showing increased growth in the 4th quarter of 2012. Since QCOM has several of Huawei's devices, INTC may only get 20% of Hauwei's smartphone sales or maybe 9 million units. It is hard to tell which device will end up being the favorite in terms of sales, but this seems like a reasonable assumption.
Other companies have also launched Intel powered smartphones for high growth markets. Acer is producing the Liquid C1 for Thailand, Lava XOLO device is targeted for India, and Lenovo K800 is targeting China for sales. Megafon Mint is targeting the Russian market and Safaricom is marketing toward Africa. Orange and Motorola (MSI) have its Intel powered devices marketed for Europe, China, and Brazil (Intel.com). These sales added to the other devices with ZTE and Huawei including Intel chips could be up to 60 million units for 2013. At an average price of $15 a chip (according to BusinessWeek) this would constitute almost a billion dollars in sales in mobile and we could expect roughly $150 - $180 million in earnings from those sales based on previous year's margins from Google Finance. Unfortunately, for a company as massive as Intel, this translates into 3-4 cents earnings per share and at the current P/E multiple adds .30 - .40 to the share price again less than 2% growth from smartphones in 2013. Ok, not exactly stellar growth and one of the reasons Intel is out of favor right now. This also creates an opportunity to enter a stock that has been beat up in the market and be a part of the turnaround story, if you believe in Intel's ability to build leading edge chips.
Intel is betting big on smartphones now
Let's review the current processors Intel is expected to launch in 2013 to see what kind of growth it may see in design wins, which ultimately powers growth in the smartphone market. I think Intel has something big up its sleeves. When it announced capex spending would increase $2 billion dollars to $13 billion I saw this as a sign that Intel was ramping up for what it believed was a big design win. Last year, at the Annual Investors meeting, a presentation was provided by Hermann Eul & Mike Bell of Intel Mobile and Communications Group, I included an excerpt from that presentation below: Intel Roadmap
"They started by showing Intel technological know-how for mobile applications and Intel R&D commitment with over 3,000 engineer working on software for Windows, Linux (Intel is No. 2 contributor) and other operating systems, including 1,200 working on Android for mobile.
Then they gave some details about Atom Medfield processor, their first smartphone processor, which can be integrated into smartphones that support 8MPixel camera, 1080p video via HDMI and last 14 days on a single battery charge (using a 1460mA battery). They also mentioned Anandtech article showing Medfield based Lava XOLO X900 beats the competition in terms of performance (for some benchmarks) and matches the power consumption of existing smartphones.
They also showed their smartphone platform roadmap with processors for both the high end and lower end segments of the market."
My thought is if the Atom based Medfield chip has already caught the competition in terms of processing power and battery life, then Intel will quickly bypass the competition as it utilizes its design and manufacturing competitive advantage to corner the market. Of course, the competition will be releasing the next generation chip soon so Intel is not on the leading edge yet but it has caught the pack at this time.
Intel is convinced it will be working on 10nm technology by 2015. Chips this size will be more powerful and energy-efficient and I believe Intel will beat ARMH and QCOM in continuously manufacturing smaller chips keeping this advantage of both power and efficiency. Also, Intel has developed 3-d transistors which are stacked transistors, allowing even more to be packed onto an ever decreasing chip size. Intel's strategy, as shown by the road map, includes going after both the high end and low end smartphone segments of the market to maximize its dominance.
Now performance and battery life isn't everything for a phone-- it also needs a great baseband chipset, particularly if you want into the high-end segment of the market. Until recently, Intel has been completely quiet on the LTE front and mostly catered to the low end markets where this technology is not used yet. But for growth in the U.S. market, Intel must have LTE capability. Intel bought Infineon, a German company that used to make the wireless chips for Apple. Intel is also acquiring 1700 patents from Interdigital in Wi-Fi, 3G and LTE technologies. So Intel has already added resources to address this piece of the smartphone puzzle. I found an article about the Signals Research Group's New LTE chipset performance quoted below:
Using a lab-based testing approach on the Spirent 8100 LTE test solution, SRG collected and analyzed the data performance of eight LTE baseband chipsets from Altair Semiconductor, GCT, INTC, NVDA, QCOMM, Renesas Mobile, Samsung Electronics, and Sequans Communications. Three chipsets distinguished themselves from their peers with Intel's pre-commercial solution capturing top honors.
Signals Research Group's New LTE Chipset Benchmark Study Highlights Wide Variance in Performance 3/14/2013
This is just a test but it bodes well for Intel starting to break into the high-end segment of the market and can finally come home to deliver solutions in the U.S.
People will say you can wait and see what materializes out of Intel but according to "Intel Bets on Fabs, Again" Intel has 22-nanometer, 3-d transistor products due out in late 2013. Intel has already caught up to the competition and with this generation is trying to pull ahead. If Intel is successful, it will be viewed by the device makers as one of the big players in this space. This is particularly important since Intel is already dominating in PC and servers, leaving smart-phones, tablets, and hybrid notebooks as the only markets to grab major market share.
I expect slow growth of smartphone design wins for Intel until later this year but by 2014 Intel should be solidly in the group dominating smartphones. For the current year we see foundry opportunities for Intel shaping up with a major rumor that Apple may use Intel for its foundry. I like the idea for one reason and one reason only, learn from the process and develop a stronger relationship with AAPL. I have read remarks from the current CEO Paul Otellini that he would entertain becoming a foundry for certain strategic partners. I don't think building ARM-designed chips fits that scenario.
But with a year to work on optimizing the Intel chip for the iPhone, maybe a little short term discomfort is worth it if Intel comes out with the iPhone and iPad running on Intel chips by 2014. I am still unsure if I like the idea of this foundry business for Apple, but I read it could be worth up to $6 billion in revenue, though my back of the napkin calculation puts it closer to $2 billion. I can see why Intel has to at least entertain the opportunity.
I see a lot of upside to a position in Intel and not a whole lot of risk. Intel has a fortress balance sheet and pays out a 4% dividend that is under 40% for a payout ratio. With the stock price down around $21.5 and the possibility of gathering 10-15% of the smartphone market share by the end of 2014, I see good growth possibilities and a financially sound company. I also feel the hybrid tablet laptop design that is coming out will spark more growth in the already Intel dominated PC market. All that and a 4% yield on the dividend and I think this is a smart stock to get in now and watch as Intel executes its strategy to steal the smartphone market.