The ARM Ecosystem Defeating Intel? Not Going To Happen, Period

| About: Intel Corporation (INTC)

There have been many debates over the past few months on whether Intel (NASDAQ:INTC) has lost mobile once and for all and if it will be able to get in and take the lead. There have also been many people and analysts that have taken the view that the ARM (NASDAQ:ARMH) ecosystem is here to stay and will eventually take the reins from Intel in many areas of the semiconductor industry.

In this article I will address those views but not from a technical point of view, like the excellent fellow contributor Ashraf Eassa has done over and over again. Instead I am going to focus on the three things that make Intel tick and are the reason it enjoys an almost an undefeatable position in the semiconductor industry.


The first and more obvious advantage Intel has over its competitors is its scale. By scale I mean that Intel is the biggest chip manufacturer in the PC industry by far. This means that it can spread its research and development costs across much more units than its competitors and thus maintain its technological lead without charging too much for its products.

Another good think about Intel's massive scale advantage is that it is so big that it can help Intel expand to smaller adjacent markets without many of the disadvantages a new entrant would have. For example, Intel is entering the smart-phone market but it doesn't have to start from scratch. It uses its already developed know-how and its huge cash flows to rapidly build competitive enough products to take the technological lead in that market too.


However, scale on its own isn't enough. In this particular business where companies must innovate continuously just to stay afloat one must have the discipline and the right procedures in place in order to be able to innovate reliably and sustainably over the long-term. In the case of Intel its culture is what keeps the company disciplined and focused on what really matters, innovation.

The excerpt below is from an article about Intel's former CEO, Paul Otellini and it describes the unique culture Intel has.

Intel structured and thought of itself like a research laboratory, according to long-time Silicon Valley journalist Michael S. Malone, in his 1985 book, The Big Score. "The image of a giant research team is important to understanding the corporate philosophy Intel developed for itself," Malone wrote. "On a research team, everybody is an equal, from the project director right down to the person who cleans the floors: each contributes his or her expertise toward achieving the final goal of a finished successful product."

Malone went on that the culture of Intel was not that of a bunch of loosey-goosey risk takers, but true believers, almost robotic in their dedication to Intel's goals.

And this is what Mr. Otellini had to add about the tremendous focus Intel has on getting the job done.

What's clear is that when Intel has a single competitor to focus on, they are hard to beat. "The thing about Intel is that we always come back," Otellini told me. "We put resources on it. We get focused. And watch out." They out-innovate, out-manufacture, and out-compete any company that comes into their targets.


The final element in Intel's success is its people. Since Intel is the leader in semiconductor technology and has the biggest financial resources in the field it attracts the best and most experienced people in its industry. That is an advantage that is crucial for its future since having the right people to do the right job is the corner-stone to everything we have talked about so far.

The Takeaway

Intel has shown time and again that it has both the resources and the necessary will and focus to rise up to any challenge that is within its technological circle of competence. There are many who believe that although Intel can defeat almost any single competitor if it focus on it, it will lose to the ARM ecosystem because there are too many competitors to fight at once (Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA) etc.].

However, they forget that although there are many competitors in the mobile space, the goal for Intel is one. To build a chip that runs faster than all the others but consumes less energy. Intel has already focused on that and there are plenty of evidence that it may have already succeeded.

And don't forget

Fortunately for investors Intel is one of the few stocks left in this market that is still trading significantly below its fair value and offers a nice 3.7% dividend.

Intel is now trading at just 13 times its expected 2013 earnings of $1.85 per share. One reason Intel is undervalued is that it should trade at 15 times earnings due to its durable competitive position and its prospects at the mobile and tablet markets.

The other reason is that the consensus estimate fails to take into account the flood of new tablets and ultrabooks that's coming in the second half of the year. These new devices will be build around either Intel's powerful Haswell (which offers powerful graphics too) or its power efficient Clover Trail+.

My estimate for Intel's 2013 EPS is around $2, meaning a fair market value of at least $30 per share. This is 25% higher from Intel's current price levels.

What do you think? Can Intel be indeed brought down by ARM's ecosystem? All comments are welcome, please share them below.

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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