Intel (INTC) shares are down considerably from last year and near the 52-week low of 19.36 it hit on November 21, 2012. On the other hand Qualcomm (QCOM) is essentially flat, in terms of share price, and ARM Holdings (ARMH) has gained approximately 56% over the past year. Nvidia's (NVDA) share price is down about 10% for the year, which still clearly outperforms Intel's price performance. Intel is not exactly the darling of the market anymore and both the share price and the price/earnings (P/E) multiple reflects that fact. Being the bull on Intel that I am, I am taking this current price point as an opportunity to invest in this company. I see huge potential in this company as it executes its business strategy in becoming a dominate player in the mobile market. In the last article I wrote, "Intel: Chipzilla Wants into your Smartphone" I investigated the current state of execution for Intel's smartphone strategy and show estimates for sales growth in that segment of the market. In this article I will investigate the execution of Intel's strategy for the tablet market. In both markets Intel has a lot of work to do to become a dominate player but will see results.
First, we need to look at the overall size of the market for tablets. The International Data Corporation (IDC) recently upwardly revised its estimates for the tablet market. According to the March 12, 2013 IDC Press Release the overall market for tablets is estimated at 190.9 million units with the success of smaller lower-priced devices adding 18.5million units to the previous estimate of 172.4 units. IDC also predicts a growth rate of around 11% for the years 2013-2016. The chart below, from the IDC Press Release, shows the estimated market share of each tablet operating system.
Tablet Operating Systems, Forecast Market Share and CAGR 2012-2017
Source: IDC Worldwide Quarterly Tablet Tracker, March 2013
From the table you can see that the Android OS is expected to overtake Apple's iOS this year. The IDC Press Release also predicts that the Window OS from Microsoft will gain market share at the expense of both the Android OS and the iOS. The table also shows the Window OS has a greater growth rate than any other OS, which of course, is good news for Intel .
Intel will enjoy the growth rate of Window OS in extending its market share in tablets. Windows OS is expected to be 2.8% of the market for 2013, which would be 5.35 million units. If we assume $21 for the processor chip, I don't have hard data on the price point but did find this cost breakdown for the Google Nexus 7, which uses the Tegra 3 chip from Nvidia , then that equates to $112.35 million in revenue.
Of course Intel is not in every device that runs the Windows OS so it would not earn all of the $112 million in revenue. But Intel is now focusing on the Android OS and should see some design wins this year with the Clover Trail+ announced at the Mobile World Congress last month. This will generate more revenue from the tablet market for Intel this year but I believe it will be next year when Intel truly sees remarkable growth in its market share of the tablet market.
The tablet market is changing and I believe the change is positive for Intel. The tablet market is colliding with the laptop market through hybrids and convertible ultrabooks. I believe those products will mark the high end of the tablet market in the near future. Intel already has two products out to serve this market with the Lenovo Think Pad 2 and the Dell Latitude 10 Enterprise. According to the companies' websites these products are compatible with existing office and enterprise environments, which will be highly attractive to business clients. I don't believe the market share estimates from IDC takes this into consideration. While I believe sales from this segment will increase the market share of Windows operating systems I do not believe the extra sales will lead to remarkable revenue for Intel in this market in 2013. Intel does have the Clover Tail+ SoC that it announced at Mobile World Congress that will begin to see success in the Android operating system, which will increase sales revenue for 2013. Where I see the real uptick in Intel revenue is with the release of the Bay Trail. The Bay Trail will be the first quad core Atom SoC and will support both Windows and Android operating systems. This will bring a high-end chip solution from Intel that will allow for Intel chips to service the high growth Window OS segment and the already dominant Android OS segment. This is the chip that begins the march to dominance in the tablet market for Intel. This allows for a tablet hybrid that I can disconnect from my keyboard and use android based applications and watch videos on a very light mobile device, perfect for my personal use. But if I need to complete traditional PC work products like Word documents or Excel spreadsheets I can connect my keyboard and get to work. This is the very product I personally have been waiting on to be excited about tablets. A great design for this product will bring both business users and consumers to the table eager to purchase. The Bay Trail also competes nicely with the other chips available and Intel should receive more design wins in the android operating system beyond the hybrid.
The January article on ExtremeTech tested four SoCs for power-efficiency and sums up the competitiveness of Intel Chips in the excerpt below:
The results are intriguing. For a start, the 32nm Atom out-performs Tegra 3, both in terms of performance and power consumption. Compared to Krait (which is a much newer architecture than both Tegra 3 and Clover Trail), Atom is faster, and is competitive power-wise
Bay Trail is built on a 22 nm process and is an out-of-order Atom core. The out-of-order execution makes use of instruction cycles to avoid idle time. The author of the above article stated his opinion that this would "in all likelihood blow the competition away." This new 22 nm process will rely on the 3D structure of Intel's Tri-Gate transistors and will allow for greater performance and less power consumption. It is my belief that the Bay Trail passes the competition and will bring Intel to the leading edge for tablets. It also opens up the possibility for a true hybrid tablet and strong sales in both the Windows and Android OS segments.
I would not be surprised to see Intel receive almost 10% market share in the tablet market in 2014 due to the strength of the Bay Trail. It is important to note that even with 10% of the market that would only equate to approximately 20 million units. Assuming a $21 average price per chip, Intel would generate approximately $420 million in revenue from the tablet market. Intel's annual sales are above 50 billion so even with 10% of the tablet market it would not constitute a major source of growth for Intel. But, if Intel shows steady growth in market share in the tablet market and in the smartphone market I believe it would be rewarded not with massive additional earnings but rather a P/E multiple adjustment. You have to remember that Intel trades at approximately a P/E of 10 when its five-year average is closer to 16. The market is discounting Intel because it believes it is a company from the past that is being replaced with the dominate players in mobile. A 10% market share would show steady growth and prove to the market that Intel can compete in tablets. Even if Intel is rewarded with a P/E of 12, still 25% less than its five-year average, that would provide a 20% gain in share price.
The real question, in my mind, is when you should enter a position in Intel. The last quarter of 2012 saw the first decline in PC sales and according to the IDC the decline may continue well into 2013. The majority of Intel's revenue is still derived from PCs and a continued weakness could negatively impact its stock price in the short term. I believe the current price is extremely undervalued but I also could see the market pushing the stock price lower as we move toward the April 16 earnings conference. I am watching the stock daily and will be most likely adding to my position either in the next week or closer to April 16.
Additional disclosure: I may initiate an additional long position in INTC within the next 72 hours