Quantifying The Impact For Intel On Its Entry Into Mobile

Jun.14.13 | About: Intel Corporation (INTC)

In my article "The ARM Singularity" I explained why I believe Intel (NASDAQ:INTC) is going to enter the mobile market successfully when it markets its Silvermont architecture. Indeed, even now with Clover Trail Intel is already making inroads, but Silvermont should really lead to a landslide in Intel's favor.

In this article, I will try to quantify the importance of Intel's successful entry into tablets and smartphones, and how much it might represent in terms of revenues and gross margins, relatively to its present size.

Size of smartphone market

As per IDC, the smartphone market worldwide during 2012 had shipments of 545.2 million units. This is expected to grow 32.7% into 2013, and I estimated further growth of 20% into 2014. This gives us the following unit shipments, worldwide (in millions of units):

Size of tablet market

As per IDC, the tablet market worldwide market during 2012 had shipments of 144.5 million units. This is expected to grow 58.7% into 2013, and I estimated further growth of 30% into 2014. This gives us the following unit shipments, worldwide (in millions of units):

Impact on Intel

Since Intel's true entry into the mobile market with Silvermont will only happen in late 2013, I estimated the possible impact for 2014. There is considerable uncertainty of what percentage of the market Intel might gather. I used a wide range from 20% to 60% of the market, the 60% high end could be possible with an early entry into Apple's (NASDAQ:AAPL) devices.

With these assumptions, the number of units sold by Apple would be as follows (in millions of units):

As for revenues, I used a 50/50 distribution between mid/low and high-end smartphones and tablets, similar to projections expected for 2013 by Intel and ARM (NASDAQ:ARMH). For smartphones I used an ASP of $15 in the low/mid end and $30 in the high end, coming to an overall ASP of $22.5. For tablets I used an ASP of $20 in the low/mid end and $40 in the high end, coming to an overall ASP of $30. With these assumptions, and depending on Intel's market share, the impact on Intel's revenue would be as follows:

Given that Intel's revenue consensus for 2014 is $55.73 billion, the previously estimated additional revenue from mobile would be as follows, as a percentage of the revenue consensus:

There remains a small problem. Given the much lower ASPs in mobile and the levels of gross margin in excess of 60% that Intel is used to, the impact on Intel's gross margin might be somewhat smaller than the impact on revenue. To estimate the impact on gross margin, I took a look at the gross margin on Qualcomm's (NASDAQ:QCOM) "Equipment and services" segment, which also sells a significant amount of mobile SoCs. According to the latest QCOM 10-Q, QCOM had a gross margin (excluding SG&A and R&D) for the "Equipment and services" segment of 41-44% (41% in the latest Q, 44% in the last 6 months). Since Intel won't be paying out royalties for the CPU IP to ARM, I considered 3 scenarios - gross margin of 45%, 50% and 55%. With these assumptions, the impact on Intel's 2014 gross margin would be as follows (assuming overall gross margin of 62.1% for the rest of Intel):


Given what was shown, the impact on Intel from entering the mobile market in force should be between +10.2% in revenues and +30.6% in revenues, depending on the market share it conquers. On gross margins it should be between +7.4% and +27.1%, rather lower as I expect gross margins on these products to be somewhat lower - but not devastatingly so.

These ranges on the low end do not seem enough to compensate possible losses on the PC market that are not yet reflected in the consensus estimates (which stand at +4.1% on revenues for 2014).

On the higher end of the scale, however, these imply significant upside for Intel, whose stock presently trades at 5.6 times TTM EV/EBITDA and 12.2 times forward 2014 earnings estimates. Since catching the higher-end shares of the market seen here is not easy, one must ascribe a lower probability to that scenario. This leaves us with the chance that although penetrating the mobile market will be a large positive for Intel, it might not be enough to produce significant upside on fundamentals. As a result, I say that Intel is a buy on weakness, but not something one can buy or chase aggressively. This opinion also takes into account that Intel successfully penetrating the mobile market will constitute a significant positive "story" for the stock, and might lead to multiple expansion.

Finally, Intel conquering 20-60% of the mobile market has a direct negative impact on ARM and ARM OEM vendors, like Qualcomm, Nvidia (NASDAQ:NVDA) and others. For those companies, this possibility is a clear negative.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INTC over 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.