There is something that each and every one of my readers needs to know about Intel (INTC). It's something that is very rarely spoken about in the media, particularly as the company has spent the better part of a year promoting Microsoft (MSFT) Windows 8 based Ultrabooks, but it is absolutely vital to be aware of this if you are invested in Intel or if you think you might want to be invested in Intel. Ready?
It's No Longer Just About Windows
At the Computex show in Taipei, Taiwan, Intel demonstrated its next generation "Bay Trail" system-on-chip ("SoC"). This, for those of you who aren't familiar with all of the wonky code-names, is Intel's upcoming "system-on-chip" based on Intel's newly designed "Silvermont" processor core, and Intel's in-house graphics IP. It's a low-power chip (i.e. it's not an Ultrabook chip stuffed into a tablet) and includes all of the IP blocks necessary for a modern, high end tablet system-on-chip.
More importantly, however, it can run both Windows and Google's (GOOG) Android, as shown in this video. I urge each and every one of my readers to watch this video here, as it's a lot easier to "believe" that progress is being made when you can actually see the devices powered by the chips that I and others speak of in the abstract. These aren't "Surface Pro" style bulky tablets - they're thin, iPad-class devices with nice screens and (presumably) long battery life.
See, that's what a lot of the Intel bears are really missing. Intel isn't betting its tablet future just on Microsoft (although you can bet that the company will be attempting to keep the Windows market as locked down as it can), but it is making a completely full-on attempt to become the chip-vendor of choice in the ecosystem. It's an aggressive goal, but it seems that Intel has achieved it, with Samsung (OTC:SSNLF) shipping its mainstream "Galaxy Tab 3 10.1".
Despite Windows Lockdown, The Android Competition Will Be Fierce
Quite simply, Intel driving its chips on both Windows and Android means that it has a tablet TAM larger than that of any other third-party chip vendor. With the Apple (AAPL) business serviced by Apple's in-house designs and unlikely to move to Intel's (or anybody else's) chips in the foreseeable future, and with Windows RT a complete, incompatible disaster that only its mother, Microsoft, loves, only Intel can provide chips for the Windows 8 and Android platforms.
Now, while the "battles" on Windows 8 aren't likely to be all that fierce (since nobody wants Windows RT, and all OEM support save for Dell and maybe a few others has been dropped), the ones on Android will be. At the high end, Nvidia (NVDA) and Qualcomm (QCOM) will be fighting vigorously for designs. In this space, market share shifts seem to happen pretty quickly (case in point: Qualcomm had no real tablet designs last year, but this year owns many of the tier 1 designs from the next gen Kindle Fire to the Nexus 7 - Nvidia, on the other hand, doesn't appear to be in any major "headline" Android designs this round).
It really comes down to this. Can Intel provide a solution that is best in class on a performance/watt perspective? Can it do so in a cost effective manner? If the answers to this turn out to be "yes" (and I have every reason to believe so from what I've seen so far), then Intel will have a winner on its hands that will go into many tablet designs. If the answer is no - then it'll be another tough year on the market share side of things. However, given that Bay Trail improves substantially on the prior Clover Trail(+) designs which were based on a 5 year old CPU design and middle-of-the-road graphics processors (used for time to market reasons), and further given how competitive Clover Trail was on a core-for-core basis with Qualcomm's Krait 300, it seems like a no-brainer that Bay Trail has a real shot of being a leadership part on performance and power.
Intel 2014 Tablet Market Share Likely To Be Substantial
It is my view that Intel will gain substantial tablet market share in 2014. With AMD's (AMD) offerings in the tablet space unlikely to be competitive, and with Windows RT a stillborn, Intel is likely to own at least 90% of the Windows tablet space. Let's assume that Microsoft gets about 15% of the tablet space (about a doubling from current levels). Now, Apple's market share has been on the decline and saw its piece of the pie shrink to 32.4% of the overall market (although Apple probably has a significantly higher share in the higher end markets). Let's say that Apple's share shrinks to 20% of the worldwide tablet market during 2014. This leaves Android with the remaining 65%.
So, let's say Intel takes 0% of the Apple share (since Apple does its own apps processors), but takes 90% of Windows, and 30% of the Android space. This would suggest that Intel would own 33% of the tablet market. Now, it's no secret that the amount of dollar content per chip that Intel takes in on a tablet processor over, say, a PC processor is much lower. Platform ASP for Intel's PC client group is just about $110. Now, while Intel doesn't publish its mix, note that these processors can range in price from $40 to $999.
Fortunately for Intel, the higher end of the PC market is relatively safe - the power users, business users, and generally high end PC buyers aren't likely to substitute these types of PCs with a tablet. However the cheap PCs - the ones that go for about $300 - $600 - these are going to be under serious fire. The platform ASPs for these products are probably more along the lines of $30-$50, given that Intel currently sells Celeron processors (CPU + chipset) into Chromebooks that sell for a mere $199. From that perspective, if Intel can gain a gross margin dollar improvement in moving its low end PCs to these Atom derived products that are much cheaper to make, and if it can drive significant volume through its participation in the Windows + Android tablet opportunities, then net/net Intel's client processor revenue (PC + tablet) should be meaningfully ahead of 2012/2013 numbers during 2014 (and quite possibly ahead of 2011 numbers).
But the real thing to look for is sentiment. If Intel starts winning high profile tablet and smartphone designs, then all of a sudden the PC weakness won't matter so much, and the price investors will be willing to pay for the earnings will likely be meaningfully higher, in anticipation of future growth. That's why IDF 2013 looks to be particularly interesting, since Intel's partners could potentially announce a flurry of Android and Windows 8.1 based tablet devices.
Intel is likely to no longer be tied to Microsoft going forward. While the traditional PC businesses will still be cash cows for both Intel and Microsoft, it would be foolish for Intel to put all of its eggs in the Microsoft basket, since broad adoption of a new OS platform is nothing near a sure thing. If Windows 8 becomes the tablet OS of choice, then wonderful - Intel benefits. If not, Intel will - for really the first time - offer highly competitive products in the Android space, which will allow it to meaningfully grow share in new markets, whether Windows is able to succeed in this space or not.