The whole PC industry has been under siege due to the consumer shift from PC/laptops to smartphones and tablets. PC unit shipments declined by a staggering 14% in the first quarter of 2013 as tablet shipments increased at a rapid pace. PC stocks like Dell (DELL), Hewlett Packard (HPQ), Intel (INTC), Microsoft (MSFT) and Advanced Micro Devices (AMD) saw a sharp stock decline when IDC announced the Q113 PC shipment data. The decline of the PC industry is nothing new with shipments declining by 3% in 2012. Advancements in tablet hardware and software are taking place at a breathtaking pace with major technology companies like Google (GOOG), Apple (AAPL) and Samsung (SSNLF.PK) directing massive marketing and research resources into tablets.
The sale of cheap $100-200 Android tablets is powering the >50% growth of the tablet industry. The leaders of the PC industry are fighting back strongly to stem the decline in their revenues and profits. Intel is at the forefront in fighting this war against the new technology companies. The company has been marshaling its huge technological and manufacturing resources to carve out a dominant position in the mobile devices industry. The company has rapidly ramped up its fab and R&D spending to make a big splash in the mobile chip space. The company is also reorienting its PC processor division to better compete with the onslaught of the tablet makers. The company will launch its new "Haswell" 22 nm chips in the first week of June and this could mark a major turnaround for the PC industry. Its PC ecosystem partners like MSFT, Dell and HP will also benefit massively from these chips as it will allow PC OEMs to make products which can beat the tablets at their own game.
What is Haswell and how it turns the tables on tablets
"Haswell" is the codename for the new architecture which will replace Intel's current Ivy Bridge architecture. Haswell, like Ivy Bridge, will use Intel's same leading edge 22 nm process node but its performance will be much better than Ivy Bridge. These new Haswell processors will power a new generation of ultrabooks and laptop/tablet hybrids.
- Battery Performance - The biggest advantage of Haswell will be its battery performance. Intel claims that Haswell will deliver "the single largest generation-to-generation battery life improvement in Intel history". Haswell was designed with great emphasis on power management and it will be one of the most efficient chips on the market. Ultrabooks using Haswell chips will be able to run for more than 9 hours without charging. This will make them seriously competitive with tablets such as iPads.
- Graphics performance - Graphics and display technology has become extremely important to customers and can make or break a new computing device. Intel is claiming that the graphics performance for Haswell will be twice as good as Ivy Bridge's graphics performance.
- Versatility - Haswell will be able to power a wide variety of devices and will have a number of variants to suit the different power and price profiles of different devices. Haswell chips will be used in "all-in-one" PCs, laptops, hybrids as well as tablets. The lowest powered Haswell chips will have a TDP as low as 7W which will allow it to compete with low end ARM powered tablets.
There are many other advantages (eg. 10% improvement in processing power) that Haswell will have over its competitors in the market. However, the biggest improvement will be Haswell's battery performance, which will allow Intel to compete effectively with ARM in the mobile devices market.
What will be the pricing and margins for Haswell chips
According to extremetech, the pricing of Haswell chips will be in the same range as the Ivy Bridge chips. In fact some of the variants will have slightly lower prices than Ivy Bridge chips. This is a smart strategy as Intel realizes that PC vendors like Lenovo, HP and Dell are having a hard time selling expensive ultrabooks and laptops. These companies don't have the cushion to pass on higher processor prices to their customers who are shifting towards lower priced ARM (ARMH) products. However, this will not hurt Intel's margins as it would be producing the chips on the same process node. Haswell processors will sell for ~$175-$327 and should give an estimated gross margin of 55-65%.
When will we see the Haswell products
Intel has already starting shipping Haswell products to its PC OEM partners and will officially launch the product in Taiwan on 4th June. The company has started a high decibel marketing campaign to push Haswell.
What could go wrong with Haswell?
There were rumors in early April 2013 that Intel was having problems in integrating voltage regulation in Haswell designs. The biggest advantage of Haswell is improved power management. This integration of voltage regulation is extremely crucial for Intel. Intel was quick to dispel these rumors and said that it had managed to integrate the VR function successfully.
All major PC companies will be introducing laptops, hybrids and desktops based on Haswell chips in the 2nd and 3rd quarters of 2013. Intel has already wowed viewers with its 13.3 inch Haswell laptop prototype "North Cape". This laptop/tablet hybrid allows the laptop to convert into an 11.6 inch tablet with the push of a single button. The 13.3 inch display is used when the device is running as a laptop and the 11.6 inch display is used when the device is running as a tablet. The early laptop/tablet hybrids have not been good enough in design and ease of use. However, Haswell promises to change the game and could seriously give ARM tablet makers a run for their money.
Who else will benefit from Haswell
Lenovo - This Chinese giant has managed to avoid the worst of the PC shipment decline in the last two quarters. However, the company is not immune to the secular decline in the PC industry and has already made a very aggressive entry into the smartphone industry. Lenovo is a close Intel partner and is about to launch a flagship smartphone (K900) using Intel's "Clovertrail" chips. Lenovo is also going to start a Yoga line of products using Ivy Bridge processors. I expect that Lenovo will be one of Haswell's biggest customers in the coming year.
Microsoft - Microsoft like Intel has been pushing hard into the mobile devices industry and has launched the Surface tablets on its own. The newer Windows versions are becoming mobile friendly and Haswell ultrabooks will give Windows 8 a further boost. The North Cape prototype used a Windows 8 operating system.
Apple - There are strong rumors that Apple will launch a new line of Mac products using Haswell chips. If Intel delivers on its promise of delivering a radically improved processor, then Apple might not have a choice as competing processors will be outclassed on performance/watt metrics. There are already credible rumors that Intel will start shipping Haswell processors to Apple in May for Apple products that will be launched during the fall. The Macbook Pro's biggest upgrade might be the usage of a Haswell processor.
Google - I am not that sure that Google will benefit from Haswell as its Android operating system holds the second largest market share in tablets currently. Unlike Apple, the company is almost non-existent in the PC space. However, there are rumors that Google will start selling its higher end laptops, "Chromebooks", using Haswell processors.
Other PC vendors - HP, Dell, Toshiba, Fujitsu and Acer should also benefit from a revival in the PC industry's fortunes. These companies have been unable to fight against tablets as both Intel and Microsoft did not have the hardware and software to compete effectively. As Intel levels the field with ARM in power efficiency, these companies will be able to fight back.
Stock Performance and Valuation
Intel's stock has run up slightly after the company delivered a good performance despite a big decline in PC industry shipments. Analysts had feared the worst and the stock went up when the fears were found to be false. The company is trading at ~$23.4 which gives it a forward P/E of ~11x. The biggest attraction of Intel's stock is the ~4% dividend yield which is the highest for a big technology stock. The company also buys back a massive amount of stock each year using its monstrous operating cash flows.
I have repeatedly written about the advantages of buying Intel stock as the market is not factoring in Intel new catalysts. The world's largest semiconductor company possesses massive advantages both in technology and manufacturing. It has one of the biggest moats in the technology industry and does not deserve to trade at such a cheap valuation. The company's stock has already seen a slight uptick after its recent quarterly results. The introduction of "Haswell", "Baytrail" and "Merrifield" should see the stock go much higher in my opinion. The company not only remains a "monopoly" in the PC processor segment but will also become a huge player in the mobile semiconductor industry. I can't think of a better stock in the technology industry that has such a good risk reward tradeoff.