Recently Intel (INTC) has been gaining technological advantage over its rivals especially in the mobile space. However, I question the long-term sustainability and total cost of this short-term advantage.
For Intel to maintain its technological advantage will require making constant heavy R&D investments. In addition, unlike many ARM (ARMH) designers that outsource the manufacturing to companies like TSMC (TSM), Intel has in-house manufacturing. Technological advancements therefore also require investments into manufacturing processes, i.e. capital expenditures. Below is the chart comparing changes in Intel's revenue, R&D costs and Capital Expenditures from 2007 to 2012.
(Source: INTC 10-K SEC filings 2007-2012)
As the chart demonstrates, R&D costs have increased twice as much as revenue in the corresponding period. Capital expenditures (property, plant and equipment) have increased three times as much as revenue. The significance of this is highlighted by the fact that in 2012 R&D costs were as much as 19% of revenue and capital expenditures were 20% of revenue. In other words, keeping up with the competition doesn't come without cost.
It is often the case that companies make significant upfront investments and get to reap the benefits later on. Margins expand as the competitive position improves and the pace of investments slows down. While Intel's competitive position is indeed improving, it's unlikely that the company can slow down the pace of investments. On the contrary.
Historically, Intel and AMD created a duopoly. However, now Intel is standing "alone" against the tide of several innovative and resourceful ARM competitors like Qualcomm (QCOM) and NVIDIA (NVDA). Also Apple (AAPL) and Samsung (SSNLF.PK) are designing processors in-house. TSMC also benefits from ARM designers outsourcing the manufacturing. These are all tough competitors to beat over the long haul.
Even if the ARM players suffer short-term setbacks due to Intel gaining the upper hand, they have enough financial resources to stay in the game for the long run. The ARM ecosystem will stay viable by the virtue of providing an alternative as the industry doesn't want to be dependent solely on Intel. Because of such strategic considerations and interests, it's not as clear-cut as who has the best product. The ARM competitors will keep coming back and Intel will have to keep fending them off. The advantage is likely to shift back and forth over the coming years.
The product is likely to become increasingly commoditized due to competition. It's also quite telling, that at least in the mobile space the selling point is shifting from performance to power consumption. At the same time, maintaining the competitive position in this increasingly commoditized market requires heavy and constant upfront investments while technological uncertainties remain high.
If Intel gains substantial momentum in the short term, the share price is likely to follow. Ride the wave, but don't overstay your welcome. The Return of the King might be short lived.