Intel - Krzanich Moves Quickly Off The Blocks On Mobile Strategy With GPS Acquisition And 'Devices' Group

May.30.13 | About: Intel Corporation (INTC)

The new Intel (NASDAQ:INTC) CEO Krzanich has not wasted much time in focusing the company's energy on new product segments, as the PC market faces a big decline. Intel's all around strengths in the semiconductor market have prevented a big decline in the stock price as compared to other "PC stocks" like Dell (NASDAQ:DELL) and HP (NYSE:HPQ). However, the company is not immune to the travails of the PC industry as it has seen its revenues stagnate. The company is now making a strong effort to enter the fast growing mobile devices market. I have already written how Intel has introduced impressive processors for smartphones and tablets. The company's 32 nm "Clovertrail+" processors have already won some crucial design wins from Samsung (OTC:SSNLF) and Lenovo (OTCPK:LNVGY). These processors have been compared favorably to ARM (NASDAQ:ARMH) designed processors in different benchmarks. However, these chips will be outdated by the end of this year, when Intel introduces new cutting edge Atom chips based on the Silvermont architecture. Intel is also making some crucial changes in its management structure to reflect its increased mobile focus. Brian Krzanich has created a new "devices" group which will look to enter into the new computing devices markets such as "wearable computing". While Intel's stock has gone up by ~20% since I first wrote about Intel's huge strengths in the technology market, I feel that the stock has a long way to go up due to "Haswell" launch in June and "Baytrail", "Merrifield" and "Avoton" introduction in December.

Intel creates a new Devices Group

Intel's new CEO has shaken up the company's massive bureaucracy by creating a new group to focus on new market trends. This shows that the new CEO does not want to restrict Intel to the tablet/smartphone markets, but will also look at creating chip solutions for the future product categories such as "smart watches", "smart glasses" etc. This new group will be headed by Mike Bell who was earlier a co-head of the "mobile devices" group. Mike Bell will directly report to the CEO. The "mobile devices" group is set to be Intel's fastest growth segment as Intel will launch cutting edge 22nm processors in 2013 end. They should give Intel a good shot to capture a big chunk of the ~$40 billion mobile semiconductor market. However, Intel is also looking to become a leader in new products. This will prevent Intel from missing the bus as it did with smartphones and tablets.

"As your CEO I am committed to making quick, informed decisions. I am committed to being bolder, moving faster, and accepting that this means changes will be made knowing that we will listen, learn and then make adjustments in order to keep pace with a rapidly changing industry," Krzanich said in the email, according to the source…"The new devices organization is responsible for rapidly turning brilliant technical and business model innovations into products that shape and lead markets," Krzanich said in the email, according to the source.

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Intel's new Atom architecture will be a game changer

Intel's new Atom processors will disrupt the mobile chip industry as it will be manufactured in the industry's most sophisticated factories. The company possesses a monopoly like position in the server and PC MPU market due to its manufacturing and technology leadership. This technological lead has allowed Intel to generate ~$17 billion in operating cash flows last year with gross margins in excess of 60%. Intel is now bringing its manufacturing and technology prowess to the mobile chip market. Intel started focusing on the mobile chip market in late 2011 by signing a deal with Google (NASDAQ:GOOG) to develop chips compatible with the Android operating system. It released the first mobile chips ("Medfield") in 2012 and followed up with "Clovertrail+" chips in 2013. While the current generation of Intel mobile chips is good, they do not offer anything extra over the competition. Intel's new "Baytrail" and "Merrifield" chips will have that extra edge over the competition as they will be produced using a new architecture in the world's best semiconductor factories. Intel will refresh its Atom architecture after 5 years, which will give the new chips better energy efficiency, graphics and performance. These chips will be made on 22 nm compared to competitor chips from Qualcomm (NASDAQ:QCOM), Mediatek and Nvidia (NASDAQ:NVDA) which are being produced on 28 nm. By the next year, Intel will introduce a better architecture "Airmont" which will produce chips on 14 nm.

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Intel faces risks from AMD, Qualcomm and Nvidia but it should overcome them

Intel's chip competitors are not sitting still and are fighting hard to improve their technology and products. However, these companies are handicapped as they do not manufacture chips but outsource it to foundries like TSMC (NYSE:TSM), Global Foundries, United Microelectronics (NYSE:UMC) etc. They can't make their ARM chips on leading edge nodes as nobody in the world has them except Intel. Advanced Micro Devices (NASDAQ:AMD) recently announced the availability of its new "Temash", "Kabini" and "Richland" chips and touted their advantages over Intel. Qualcomm and Nvidia are also trumpeting their quad core SoCs for mobile devices. However, these companies will be left at a disadvantage because Intel will produce cheaper and better chips at its 22 nm equipment. Qualcomm which has a greater than 50% market share due to its communication strengths has the greatest to lose from Intel's mobile chip entry. Intel had bought Infineon's communication division to offer an integrated 4G functionality in its mobile SoCs. Intel has also bought the GPS assets of the ST Microelectronics (NYSE:STM) JV to further strengthen its mobile offering.

Intel builds on the Infineon Acquisition by buying the ST-Ericsson GPS assets

Intel is steadily increasing its mobile silicon strengths by strategically acquiring key mobile technologies from declining European semiconductor companies. The company acquired ST-Ericsson's GPS division for a rumored ~$90 million to bolster its mobile SoC offering. The company will probably merge the 130 member team into its "mobile devices' division.

Stock Performance and Valuation

Intel has managed to keep up with the general uptrend in the broader market and has stabilized at the ~$24 level after breaking out of the $20-22 range. Other PC sensitive companies such as HPQ, Microsoft (NASDAQ:MSFT) and AMD have moved up much faster than Intel. I think that Intel's stock will go much higher in the coming year, as its strength in the mobile market starts getting recognized by investors. Intel's stock trades at a forward P/E of 12x with a P/B and P/S both at ~ 2.3x. Despite Intel's upcoming catalysts and formidable strengths, the stock still trades at ~35% discount to the S&P 500.

Summary

There is absolutely no doubt in my mind that Intel will win a big chunk of the mobile MPU market. The only question in my mind is how big will the market share be and whether Intel can gain a monopoly like position similar to the PC market. Intel's new CEO is showing great intent by looking to build products for the future computing products. Companies like Apple and Samsung are looking to produce new computing device forms to gain an edge over the competition, but lack the necessary hardware solution. Intel can create a huge new market by offering solutions to these mobile device leaders. I have become even more positive about Intel's stock after this move.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.