I apologize for the somewhat dramatic title, but at this point, I'm finding it unbelievable that many Intel (INTC) "investors" are choosing now to bail. It is my belief that anybody who did not fundamentally believe in the Intel story should have sold years ago, and that those who truly understand what is coming should not be frightened now, but instead be taking any and all opportunity to double down for what is likely to be the realization of the multi-year long thesis. This, my dear readers, is, in my view, quite possibly the last chance to get in before what I believe to be a powerful reversal in both the business and, more importantly, sentiment surrounding the stock.
Full Year Guide Down? Give Me A Break
So, Intel actually went ahead and guided down the year from expecting sales to be up 2% Y/Y to merely flat Y/Y. While slightly disappointing (and, probably a sobering development for ultra-bulls such as myself), it is ultimately immaterial to the long-term thesis. Intel will go the entirety of 2013 without having any meaningful smartphone design wins (for lack of a suitable product), and tablet momentum should only begin to ramp during Q4 when "Baytrail" based tablets start to roll out. The data-center growth story is what keeps the full year largely intact, as Intel not only commands significant market segment share here, but has the roadmap in place to keep that share intact while expanding into other parts of the data-center (networking, storage, comms infrastructure, etc.).
But really, 2013 was always pitched as a transition year and even the fairly pitiful 2% growth estimates showed it. Sure, we got "Haswell," but the issue that we have here is that despite the fact that it is an excellent chip that is sure to send AMD's (AMD) last remaining high-end CPU efforts into the CPU graveyard, the traditional PC form factors are on the decline, and the thin and light PCs are still too expensive to do anything more than keep the high end (which isn't even in trouble) attractive.
So, sure, Intel guided down for 2013, but in reality it just doesn't matter. Everybody knows that Intel entered 2013 largely with its pants down, and what matters is what Intel can deliver at the end of the year with Baytrail and whether it can build and extend that momentum into 2014.
Late 2013 Will Give A Glimpse Of What Is To Come In 2014
In the back half of the year, Intel will launch a chip known as Baytrail, which is the first from the ground-up system-on-chip built on Intel's latest Silvermont processor core, an entirely new system fabric, a significantly improved graphics processor and a lot more. While Intel's tablet efforts to date can be best described as "middling" at best, it is important to keep in mind that everything available today (Medfield, Clover Trail, Clover Trail+) is designed with a 5-year old Atom core made as cheaply as possible and built on a last generation manufacturing process.
Intel's very first next generation low power, full SoC efforts arrive this year. If the Silvermont core is as good as Intel claims, then Intel should - for the first time - be able to win a substantial number of Android tablet sockets while at the same time helping to advance the state of Windows 8 based tablets (sorry, but having weak-sauce chips isn't helping Microsoft's (MSFT) efforts here) in the tablet space.
The independent reviews will come in, and the guys at Anandtech, Tom's Hardware and many other outfits will test the living snot out of this processor from a performance and a power perspective. If it's a great chip, then not only will the independent review sites tell the world that, but investors will see a boat-load of designs based on that chip. If it's not great, then it will either have to be priced extremely competitively to sell, or Qualcomm (QCOM) will continue winning all of the tablet designs into 2014 as well and then it might be time to start asking some tougher questions.
It Really Comes Down To This
So, it comes down to this: If the upcoming Baytrail SoCs for tablets and cheap laptops turns out to provide best-in-class performance/watt, then Intel will start gaining significant traction in tablets very quickly, and then you will see sentiment on the stock turn VERY rapidly and violently, and we're talking $30+ exiting the year, as people then begin to update their models to reflect much more substantial tablet (and, by extension, smartphone) market share in 2014.
Now, you'll get a few bears raising the following "concerns":
- Intel will charge too much for their chips
- All of the mobile device vendors are actively conspiring to keep Intel out of this market
- These chips will be low gross margin if priced right, so Intel is still screwed
I offer the following rebuttals.
No, Intel Isn't Charging Too Much For Baytrail
Here's a nice little tidbit from the recent ARM (ARMH) earnings call that should dispel that piece of nonsense,
Just one question again on the Silvermont. The supply chain seems to be indicating at this point that Intel has been very aggressive on the pricing of their processors in the fourth quarter whenever they are going to come I guess some point in the fourth quarter.
So, I guess Intel isn't charging too much for these chips and is actually being "very aggressive."
The Device Vendors Actually Love Intel
It's funny that many of the ARM uber-bulls/Intel perma-bears run around claiming that everybody wants Intel out of the picture and that only the ARM vendors will be allowed to play. This, of course, is complete nonsense. Let's rewind back to the most recent Intel earnings call, where the sell-side analysts actually raised very relevant questions:
The question is now that you're in that role for a couple of months and as you say you talk to customers. Today, Intel has very good products in mobile and tomorrow we'll have arguably the best products in mobile even (they do today). But I wonder in your discussions with customers if you think that that's enough? If the customer base is now open to accepting an x86 based processor in what has traditionally been an ARM market or does it matter?
CEO Brian Krzanich
And my answer would be they are more than willing to accept it. The fact that x86 works on both Android and Windows is a real advantage to our OEM base. They look at that and say that they can have one architectural design, one set of products and use both operating systems. So it's a unique feature that we are able to provide. It's more been in focus by Intel of actually going in and designing for those markets and moving our products in there.
Hm, so I guess being X86 isn't a problem, and is in fact an advantage since Intel's chips run Android without a problem, but Windows RT is DOA. But wait, there's more,
So I'd say the key message that they've (Intel's customers) been giving us is, we really want you there, we see the products coming, we want even more and we want a faster line up following those.
So, clearly Intel's customers (whom, by the way, happen to be the companies that not only own the PC space but also the tablet space such as Lenovo (OTC:LNVGY), ASUS and Acer, Sony, Toshiba, Fujitsu, Samsung and more) want Intel in this market. Now, why's that? Easy. Intel is a reliable supplier that controls its own supply chain from wafer fabrication to packaging and test, and has a history of putting out leadership products. Who wouldn't want to work with Intel as a chip partner?
Gross Margins? Doesn't Seem Too Bad
Intel is guiding for 59% gross margin for the full year, which includes 61% in Q3 and 60-61% for Q4. Do note that 2013 is a "startup year" which means that Intel is incurring the startup pains that it takes to get 14 nanometer up and in full high volume production. So, if Intel is shipping these allegedly "low gross margin" Atoms in Q4 2013, wouldn't you expect a bigger drop-off in the gross margin for the quarter?
No, the Atoms are designed to be high gross margin just like almost every other semiconductor chip out there. Other than the very low end, high volume Chinese SoC vendors and AMD, who else really accepts sub 50% gross margins on any non-commodity part? And as the numerous conference calls have told investors, it's not the high end, ultra-high margin Core products that are coming under fire, but the much lower margin Pentium/Celeron parts. So, Bay Trail and the rest of the Atoms at least get Intel back the sales that it used to have at the low end when the PC was the only game in town, and it probably comes with a better gross margin profile (since these are chips designed to be small/low power/cheap and not disabled, larger dies).
Guess that argument is out, too...
Look, if you believe the Intel story, then NOW is the time to buy. Not when sentiment has turned and every Tom, Dick, and Harry on CNBC is claiming that Intel is a "great mobile growth story." No, you want to get in right before the big sentiment change and the big fundamental business change. Anybody familiar with the technology knows that Intel is on the cusp of something great here, and anybody seriously buying a tired line of "well, Intel has been trying for 5 years and still isn't anywhere" is probably going to miss out big time.
This is the last chance to buy Intel before sentiment undergoes a significant reversal. Make your investments accordingly.