Avoid Intel, Buy Qualcomm Instead? - Part 1

| About: Intel Corporation (INTC)

With declining computer sales, Intel's (INTC) net income declined by 2% quarter over quarter to $2 billion in the second quarter of fiscal year 2013. To offset pressure from declining computer processor sales, Intel is aggressively focusing upon mobile.

Saga of mobile chips

The global fourth generation, or 4G, market is expected to grow at 47.49% over the period of 2012-2016 due to exponential growth of network traffic from smartphones. 4G provides high-speed Internet access to mobile devices. To capitalize on growing 4G mobile broadband services, Intel began shipping single-mode 4G chips earlier this year. Intel is expected to start shipping a new multi-mode chip soon. Single-mode chips are used to support only 4G data network only, and multi-mode chips support all 2G, 3G, and 4G data networks. The multi-mode chip's ability to support these three data networks is vital for smartphones as many broadband service providers still rely on 2G and 3G services.

The new multi-mode chip -- 'XMM 7160' is 12% smaller and consumes 20% - 30% less power than similar multi-mode chips existing in the market. Globally, there are around 40 frequency ranges, used to support high-speed mobile internet services. Out of these 40 frequency ranges, XMM 7160 uses 15 frequency ranges. To continue growing in the mobile chip market, Intel is expected to increase its capacity to the existing 40 frequency ranges in the world.

Qualcomm (QCOM) already supports these 40 frequency ranges, and it accounted for 97% of the market share of mobile chips in the first quarter of 2013. However, Intel is challenging Qualcomm's market dominance. Intel had a major order from Samsung (OTC:SSNLF) for its newly released Galaxy Tab 3. This is first time a Samsung smartphone contains an Intel chip. This might not impact Qualcomm significantly, since Samsung Galaxy S4 already contains Qualcomm's 'Snapdragon 600' chip. The new 'Samsung Galaxy active', an updated version of Samsung Galaxy S4, which is expected to launch soon, contains Qualcomm's Snapdragon 800 chip.

Despite chip development and the new Samsung order generating some revenue opportunities, Intel isn't expected to gain traction soon. We believe that Intel will take time to grow significantly in this Qualcomm dominated market. Looking at these perspectives, the mobile chips will not majorly influence Intel's stock price.

The 'mobile device chips' segment accounted for 64.4% of Qualcomm's total revenue in 2012. Qualcomm's market leadership and its technological advancements in this segment have made its stock attractive.

If the trailing twelve months price earnings, or PE, ratio is more than the forward PE of a stock; Qualcomm's earnings are expected to grow. Qualcomm's trailing twelve months PE ratio is 17.81, quite high from its forward PE ratio of 13.54 for next fiscal year. Moreover, it is valued fairly compared to Intel, as its price earnings to growth, or PEG, ratio is 1.05 as compared to Intel's PEG ratio of 1.09. A lower PEG ratio, near to one, is considered good as it shows that the stock is undervalued and is expected to appreciate in the future.

Intel's stock isn't as attractively priced as the trailing twelve months PE ratio and forward PE don't vary notably. The trailing twelve months PE ratio is 12.13 and forward PE is 11.37. It implies that the earnings of the company aren't expected to grow significantly.

Growth with processors or not?

Intel holds a market share of around 95% in the global processors market. Computers, laptops, notebooks, and smartphones all use processors. To challenge the market leader, Advanced Micro Devices (AMD) announced to launch three new chips by next year for low-power servers. These low-power server chips are energy efficient and are used in central processing units, or CPUs, and smartphones for reducing power consumption. Advanced Micro's new chips will be branded as 'Berlin', 'Warsaw', and 'Seattle'. With these chips, Advanced Micro's market share in the global processors market is expected to increase from 3.4% currently to 5.4% in 2014. In the Intel-dominated market, Advanced Micro is expected to gain this market share by producing chips to meet the customer's demand, something Intel doesn't do.

The server processor market was only 4.94% of Advanced Micro's total revenue in 2012. Developing this minor revenue-generating segment with the above discussed chips might provide growth opportunities, but we don't expect it to be a turnaround factor for the company. We feel that Advanced Micro needs to take aggressive steps if it is going to confront Intel's massive market share. The absence of such steps has resulted in steady movement of its stock price over the last four months.

Initially, Intel did an initial launch of its low-power server chips in the end of last year to stay ahead of Advanced Micro's low-power server chips, and on July 22, 2013, it announced to launch 'new' low-power chips. It will launch these chips by next year, and the chips are expected to be four times more efficient and perform seven times better than Intel's low-power server chips launched last year.

Intel's 'Server processor' segment accounted for 17.3% of its total revenue in 2012. With the above discussed developments in low-power chips, we believe Intel's server processor segment should increase its revenue contribution share further. However, this growth will not significantly impact the share price of the behemoth; a growth of a few percentage points won't be enough to bounce Intel's stock price.


Intel's fundamentals and stock valuation makes us forecast that the stock isn't attractively priced. Considering these factors, we advise that investors should avoid any new position in the company.

(See Part 2 of this article here.)

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.