Intel (INTC) is making big strategic moves to ensure its No.1 position in the semiconductor industry, as rivals like Qualcomm (QCOM), TSMC (TSM) are creeping closer and closer. The company is on the wrong end of a secular move in the technology industry, where consumer preferences have decisively changed towards smaller and cheaper mobile devices. The core PC market which accounts for nearly 60% of Intel's annual revenues of ~$50 billion is shrinking. It is estimated that the PC market will decline by the ~10% in 2013, which will mark one of its biggest annual declines in the history. Intel has not been sleeping on the wheel and the top management has made long-term strategic moves to shift its focus towards making processors for the tablet and smartphone market. The company has already released mobile SoCs such as Clovertrail and Medfield for the mobile markets and they have been adopted by some leading companies such as Lenovo (LNVGF.PK) and Samsung (SSNLF.PK). However, these are made on older Intel equipment which does not fully utilize Intel's manufacturing advantages over its rivals. Intel will release its new Baytrail chips for the tablet, laptop and convertible markets in late August/early September. This will be the first Silvermont chip that will be made on Intel's advanced FinFET, trigate 22nm process node, which is way more advanced than its competitors. The chips will be almost 2-3 times more powerful than the existing Clovertrail chips and will make or break Intel's entry into the mobile market.
Haswell has not "turned on" the PC market as software innovation remains pathetic
Intel's new architecture "Haswell" (successor of Ivy Bridge on the 22 nm node) has not managed to turn around the declining fortunes of the PC market. While Intel has met most of its promises with Haswell such as energy efficiency, power consumption and graphics, the market uptake for these new processors have not gone as well as planned. I think the major reason for this lack of success is that most user requirements are being met by existing products and users do not require a better processor to run the existing software/services. Unlike the mobile devices market, the rate of innovation in the PC market has been quite pathetic. Windows 8 which dominate the PC/laptop OS area has not brought anything new to the table. While smartphones have been seeing breathtaking innovation (uses of new sensors, eye scrolling etc.), the PC market appears dead by comparison. New PC innovations like touch screens have been copied from tablets and smartphones. While there is a large market for PCs with over 300 million annual shipments, a large casual PC sub-segment is migrating towards tablets. While Intel will continue to dominate the PC market (with 85% plus market share), it looks like the company will not be able to change the declining trend (unless the software companies bring something new to the table, to take advantage of the greater processing and graphics power). Intel has realized this weakness and has been preparing to take a big chunk of the mobile market for quite some time now.
As PC vendors' procurements of Haswell CPUs, including Core i5 and Core i7, have been far short of original expectations, Intel has released the processors for retail sale in the DIY market at prices US$20-30 lower than corresponding DIY retail prices, which has put the market in disorder, according to Taiwan-based retail channels. Intel declined to comment…The sources pointed out that dumping inventories to retail channels is Intel's last resort, as PC vendors have mostly turned down the company's requests. However, some market watchers believe that Intel should cut back its production capacity to stop the problems.
Source - Digitimes
Intel has been preparing hard for Mobile Dominance
Here are some actions that Intel has taken in the past couple of years:
- Signed an agreement with Google (GOOG) to make Android operating system compatible with Intel chips.
- Bought Infineon's (IFNNF.PK) communication division to add communication (4G) functionality to its mobile SoCs.
- Intel will spend almost $30 billion between 2011 and 2013 in building the most technologically advanced semiconductor fabs.
- Intel announces $2 billion investment in 2013 for producing next generation 450 mm wafers.
- Announced a refresh of its 5 year old Atom architecture - Silvermont.
- Launched its first mobile chips Medfield in 2012 followed by Clovertrail+ chips in 2013.
- Decision to produce new Atom chips at 22 nm for 2013 holiday season - dual core Merrifield for smartphones and quad core Baytrail processors for tablets.
- Intel's new Core architecture to make the biggest single generation improvement in energy performance with the lowest power Haswell chips being able to power tablets.
- Bought ST-Ericsson's GPS division in 2013.
- Major organizational reshuffle with a new "Devices" group to focus on emerging product trends in 2013.
What is Baytrail
Intel's Baytrail System on a Chip (SoC) will be the first Atom chip to be shipped using Intel's new Silvermont architecture. Intel is refreshing its Atom architecture after 5 years and this new architecture along with production on Intel's best semiconductor equipment will mark a dramatic improvement in Intel's mobile offerings. Clovertrail+ has done decently well on benchmarks against rivals which implies that Baytrail has the potential to outperform the competition out of the water. The quad-core "Bay Trail" SoCs will not only be used for tablets but will also provide the brains for entry laptop and desktop computers in innovative form factors. Intel management had indicated that touch screen laptops with $200 prices would be enabled by Intel processors and I think Baytrail would be powering such laptops very soon.
When will Baytrail be launched?
There are rumors that Baytrail-T chips will be launched earlier than expected (between August 28th and September 13th). This is good news for Intel investors as the chips will have enough time to get shipped during the crucial holiday season. Intel cannot afford delays as it is a marginal player compared to the ARM (ARMH) players such as Qualcomm, Mediatek, Nvidia (NVDA), etc. which dominate the market.
Intel will officially launch Atom processor Z-series for Bay Trail-T platforms designed for tablets between August 28, 2013, and September 13, 2013, according to an excerpt from an Intel document published by Chinese version of VR-Zone web-site. It is unclear when the chip giant plans to introduce other members of the Bay Trail family, which includes solutions for notebooks, desktops and industrial applications. Intel will offer three versions of Bay Trail platforms based on different versions of ValleyView system-on-chips: Bay Trail-T (3W), Bay Trail-M (4W - 6.5W) and Bay Trail-D (12W) for tablets, notebooks, and desktops, respectively. Actual SoCs will come in different form-factors, with different levels of performance and even with some feature-set differences. In addition, there will be server and industrial solutions based on Valleyview. For the first time in history, highly-integrated Atom system-on-chip will utilize Intel's own graphics processing technology (current SoCs use PowerVR technology). Thanks to Intel HD Graphics 4000-series graphics core, ValleyView will provide three times higher performance than today's Atoms for netbooks and nettops.
Source - X-Bit labs
Baytrail becomes crucial now for Intel
Baytrail has now become extremely crucial for Intel as it will offset the decline in mainstream PC processor sales for Intel. The new chip is said to be competitive with rivals in different tests, though the benchmark tests have been disputed by some commentators as not being conclusive. However, the early data points for Baytrail are extremely good and Intel has a reputation for delivering on their promises (at least they did with Haswell). Intel has already captured around 5% of the tablet market in 2013 by providing processors for Microsoft's (MSFT) Surface tablets. The company has also managed some design wins at Asustek and Samsung. If Baytrail delivers the 2-3x performance improvement of the existing chips, then I expect that Intel will get more design wins as tablet vendors would like to use the better Intel chips.
What are the Risks?
- Apple and Samsung design their own SoCs - Intel needs to get Apple (AAPL) or Samsung to use its mobile chips as these two companies own more than half of the tablet market. Both these companies use their own designs based on ARM IP. They will not want to use Intel processors unless there is a substantial performance/watt advantage. The companies will not want to jettison their efforts in chip design and IP creation. Samsung will also not want to kill off its logic manufacturing and lose its independence in processor manufacturing. Intel will have to beat its rivals by a substantial margin for vendors to switch over. Apple has also rumored to have recently signed a three-year deal with TSMC to gets its "A" series chips manufactured at the foundry. It would need a big catalyst for Apple to kill its "A" chips and switch to Intel chips. We know that Intel is desperate for Apple business after having missed the boat in 2008. The company has also hinted at allowing Apple to use its leading edge fabs for making ARM chips.
- Qualcomm is strong in communication - Intel is not that good in communication technologies such as CDMA and 4G LTE, which is Qualcomm's forte. Not only does QCOM get a huge amount of royalty revenues from the use of CDMA technology, but its 4G technology expertise has made it the biggest supplier of mobile SoCs to the market. QCOM's Snapdragon chips are considered as the best mobile processors in the market currently and the communication capability has played a big part.
- Low cost Asians will be hard to displace - Intel also will have to face Chinese rivals such as Spreadtrum (SPRD) which make dirt cheap processors for the low end market on wafer thin margins. The low end white box tablet vendors might not prefer Intel's higher quality, but higher priced chips.
Intel's Stock Performance and Valuation
Intel's stock has decreased slightly in recent days to the $23-24 levels due to a slew of analyst downgrades over concerns of declining PC market sales. The concerns cannot be dismissed out of hand as Haswell has not changed things in the PC market as hoped. However, Intel's stock valuation remains low with a forward P/E of 12x and a dividend yield in excess of 3.5%. As Intel mobile chips start to get traction, we should see an improvement in the stock price.
Intel has to fight an uphill battle to displace the existing dominant ARM based chip players in the fast growing mobile market. The company has to use its manufacturing lead over competitors to bring out better, faster and more power efficient processors to beat rivals by a substantial margin. Haswell has not set the market on fire as hoped as the PC/laptop market suffers from a lack of innovation. Intel has got the right strategy in place to win over the mobile market and Baytrail will be its first real salvo in the mobile war with rivals such as Qualcomm and Nvidia. I remain positive on Intel stock given its cheap stock and substantial competitive advantages.