The personal computer seems to be disappearing faster than many of us have thought. Faster than expected demise of the PC poses big problems for traditional chip and microprocessors. In particular it threatens the future of the biggest traditional chip maker, Intel (NASDAQ:INTC).
Windows 8 No Help for Intel
Intel bet heavily on the idea that last year's release of Windows 8 would breathe some new life into the PC market and lost. Intel was hoping that Windows 8 would generate extra revenues. That obviously didn't happen, because Intel's revenues fell for the last three quarters.
INTC Revenue Quarterly YoY Growth data by YCharts
Intel's quarterly YOY revenues fell by ~2.5% for the quarter ended March 31, 2013; 3% for DEC. 31, 2012; and 5.5% for SEPT. 30, 2012. The release of Windows 8 in Oct. 2012, did little or nothing to reverse the decline in revenues. In fact, revenue is expected to fall by 4.5% in the current quarter as well. It's easy to see that Windows 8 seems to have had no effect whatsoever on Intel's revenues.
Windows 8 It's Worse Than We Thought
The sales of Windows 8 and newer PCs are much worse than we thought. Charles Arthur, a writer for Britain's Guardian newspaper, estimated that Microsoft (NASDAQ:MSFT) has sold around 59 million Windows 8 licenses since October. Microsoft itself has claimed to have sold 100 million Windows 8 licenses.
Arthur noted that a lot of people who bought new devices actually bought versions of Window 8 with downgrade rights. That meant they could use Windows 7 instead of Windows 8. Arthur's little exposé proves that the public doesn't want a better PC.
He also noted that around 161 million PCs were shipped in the last quarter of 2012 and the first quarter of 2013. That represents a significant drop from the same period in 2011-2012 when 174 million PCs were shipped. In other words, overall PC sales fell by around 13 million over the past year. The rumors of the PC's demise have been verified by the figures.
The Real Challenge for Intel
The public's lack of interest in Windows 8 and corresponding lack of new sales demonstrates Intel's biggest problem. The devices that run on its semiconductors just aren't selling anymore. The public has little or no interest in PCs and, worse, no desire to upgrade to new PCs anytime soon.
In 2012, Intel's PC chip division accounted for 65% of its total revenue and a whopping 90% of its operating income. Intel has admitted that it expects little or no revenue growth for the current fiscal year. Worse, the company doesn't seem to have a backup plan to make up for the failure of Windows 8.
Even though Windows 8 hasn't been a big hit, it is probably too early to write either Intel or Windows 8 off. Intel has the expertise and production capacity to manufacture chips for other products, including tablets and smartphones.
Intel's Secret Weapon
Intel does have at least one product in its production schedule that might turn it around: the Haswell chip, or Fourth Generation Core Processor. NEC has rolled out a laptop with the Haswell in Japan. A batch of products using the Haswell, including smartphones, ultra books and tablets, will be rolled out at the Computex Trade Show in Taiwan next month.
It's obvious to see how Haswell might help Intel's sales; the processor is supposed to have double the 3-D performance of Intel's Third Generation Ivy Bridge chips. That should at least attract more customers in the tablet market. This has led Intel executives to be more optimistic about growth in the second-half of this year -- albeit still in the low single-digits.
Gamers and movie watchers will be among those that will be interested in the new processor. Haswell has some other advantages, including longer life and more power saving capabilities. This might allow device makers to create thinner and lighter smartphones and tablets with improved performance.
Intel Needs to Diversify Now
The big problem is that all of this is speculation; only one of the Haswell devices has actually been spotted in the real world, and it is an old-fashioned laptop. None of the promised tablets or smartphones has popped up yet.
If Intel wants to reverse its revenue decline, it will need to demonstrate that its processors can power something besides high-end laptops and other PCs. Intel needs to broaden its share of the tablet and smartphone market in order to increase its revenue.
Intel is moving to diversify and get beyond PCs, but it may not be moving fast enough. If the company wants to see some real revenue gains, it'll have to show that it can make the transition to the post-PC world.
Weak Consumer Electronics Market
Intel might be making the diversification move at the wrong time because the consumer electronics market is extremely weak right now. Demand for consumer electronics is low because of consumer uncertainty in North America and the dismal economy in Europe.
New smartphones and tablets are going to be a tough sale in this market. Slight increases in consumer spending aren't translating into more electronic sales. Consumers have adopted a wait and see attitude that isn't going to help new device sales.
Will the Sleeping Hare Win ?
Does the PC's demise make Intel a bargain? The company is heavily reliant on a fading, older technology, but it is pushing aggressively into new markets.
More importantly Intel does seem to have the resources to make the transition to the post PC world despite the declining revenue. Intel is still sitting on $10 billion in cash and ST investments. Intel can afford the research and development costs for the generation of processors for now.
Yet Intel might not be a good buy right now, because its share price hasn't hit bottom yet. In the next few weeks and months we're likely to get deluged with bad news about Microsoft's and Windows 8's declining market shares. That news is likely to send Intel's stock price spinning downward.
Wait and See
The best advice is to hold off on buying Intel for a couple of months. It's likely to go lower, then start inching up again once the Haswell processors come on the market in the summer. All it will take is a few shipments of tablets with Haswell processors to demonstrate that Intel is viable.
The tech gurus are right about the PC; it seems to be dying, but Intel still lives. Intel isn't a buy right now, but it's certainly a stock to watch because of the products in its pipeline.