On September 10, 2013, Apple (AAPL) brought its latest iPhone 5S to market. Immediately upon launch, hipsters, teenage girls, and celebrities were abuzz with chatter regarding the merits of new iOS 7 features, which were made complete with fingerprint recognition and Touch ID button. Meanwhile, technology geeks were eagerly deconstructing the potential of the A7 processor driving this latest iPhone installment. The A7 is unofficially hailed as the first 64-bit chip to be installed within a consumer smart phone. Competitors, such as Anand Chandrasekher, former Chief Marketing Officer at Qualcomm (QCOM), immediately circled the wagons to haughtily dismiss the A7 chip as a "marketing gimmick." According to Chandrasekher's thesis, the consumer smart phone market will have no need to leverage the full capacity of a 64-bit chip. Interestingly, Qualcomm promptly changed Chandrasekher's role at the company following said commentary.
Enter Intel (INTC), which in actuality, stands to lose the most from the expansion of this A7 chip rollout. Firstly, Intel is desperate to emerge as a real player within the mobile chip market. Secondly, Apple has already marketed its A7 processor as "desktop class." Going forward, it would appear inevitable that the advances of A-Series chip technologies threaten and replace Intel's current position as supplier to the Mac, at the same time that the desktop computer market slogs through secular decline. The Apple A7 is but an opening salvo declaring this latest war between awkward Silicon Valley rivals and partners. Certainly, Apple "haters" are well aware of the fact that BlackBerry executives once ripped the original iPhone as "amateur hour." Intel is dead money.
Apple A7 Specifications
The Apple A7 64-bit system-on-a-chip (SoC) line is based upon ARM (ARMH) architecture. Apple has designed its 1.3 GHz dual-core Cyclone CPU around the ARMv8-A instruction set. In terms of battery power, the A7 can run the iPhone 5S for 10 hours worth of 3G talk-time, and for 250 hours during stand-by mode. The Apple A7 chip is produced through a 28 nm manufacturing process at Samsung (GM:SSNLF). The A7 gate pitch, or distance between each transistor, is now 114 nm, in comparison to the 123 nm mark of the A6 chip. Apple executives claim that the A7 is twice is fast as its A6 predecessor.
The ARM business model alongside the emergence of Apple as a chip designer now threatens Intel's profitability within the mobile space. ARM collects royalty payments off chips manufactured according to its architecture and intellectual property. According to the Company Overview, ARM based technology has already been installed within more than 95% of all global smart phones. Qualcomm and Apple are the most powerful component parts of the ARM ecosystem. Qualcomm is most notable for its Snapdragon 800 chips that are packaged with a 2.3 GHz Quad Krait CPU. The Snapdragon is the go-to engine to drive premium Android, BlackBerry (BBRY), and Windows handsets.
Former Intel CEO Paul Otellini highlighted his company's "mobile edge," within his 2012 letter to shareholders. At the time, Otellini projected that Intel would be ready to ship 22nm process Atom chips by the end up 2013, before stepping up the manufacturing technology to 14nm through 2014. Last May, Brian Krzanich took up this CEO mantle, and Intel assembly mechanics are now one step ahead of what Apple is now paying for out of Samsung. Still, the Apple A7 chip measures up quite favorably to the Intel Z3700, or Bay Trail, line. One review out of Anandtech benchmarked the Apple iPhone 5 and A7 processor at 514, while awarding a score of 513 to an Intel Bay Trail device running Windows 8.1.
Intel Mobile Product Line Up
Smartphones with Intel Inside include the bargain bin Acer Liquid C1, Motorola RAZR I, and Safaricom Yolo, which are currently available in Thailand, Brazil, Mexico, and Kenya. On October 2, 2013, Lenovo (OTCPK:LNVGF) announced that it was actually dumping Intel Atom, in favor of Qualcomm chips, to power its K900 handsets. The week prior, on August 29, 2013, Virtual Matrix ran a battery life test pitting the Lenovo K900, then powered with an Intel Atom chip, against the Google Nexus 4 and its Snapdragon technology. The Snapdragon chip significantly outperformed the Intel offering, 380 minutes to 170 minutes, in terms of battery life, while running Google (GOOG) Maps. The Intel tablet lineup is largely associated with Windows 8.1. Bay Trail tablets are expected to begin at $350 heading into this holiday season. The Intel Haswell processor powers the up-market Surface Pro 2 tablet, which retails for between $899 and $1,799. The Surface Pro 2 is in direct competition with both the Apple iPad and MacBook Pro at this price point.
On October 4, 2013, research firm comScore released its report for August 2013 U.S. smartphone subscriber market share. The report actually presented averages of data taken from the June 2013 to August 2013 calendar quarter. The comScore information did confirm that Intel has largely been shut out of the mobile market. If anything, the "marketing gimmick" that is the A7 chip will draw sales and attention towards Apple. During this latest quarter, Android and iOS systems operated respective 52.4% and 39.2% shares of the U.S. smartphone subscriber market. Apple actually tacked on 1.5% in additional market share upon a quarter-to-quarter basis through the summer months.
A calendar Q2 2013 tablet shipment report out of IDC presented Windows tablet results that Microsoft critics have already ripped as "pathetic" and "disastrous." According to IDC, the Windows operating system accounted for 2 million in shipments during the second calendar quarter of 2013. This performance represented 4.5% of the tablet market. For the sake of comparison, Apple iOS generated 14.6 million shipments for a 32.5% share of the tablet market, according to unit shipments. Taken together, iOS and Android operating systems have dominated between 95% and 98% of the tablet market over the past two years. Going forward, improvements upon the A-Series chips will only crowd out Intel further outside of solid mobile profits.
The Bottom Line
On July 24, 2013, Apple released its Q3 2013 financial report for the period ended June 29, 2013. The Mac generated $15.9 billion in revenue upon 11.8 million units sold during the first nine months of this fiscal 2013. In terms of unit shipments, Mac sales have declined by 11% through the past three quarters, upon a year-over-year basis. Going forward, a transition out of Intel Haswell and into A-Series chips may reenergize excitement for the Mac line while also slashing costs of goods sold. Apple engineers will build out their moat larger at the expense of Intel.
Intel typically classifies its businesses according to PC Client, Data Center, Software and Services, and Other Intel Architecture operating segments. The Other Intel Architecture umbrella category does include smartphone, tablet, and netbook chip sales. PC Client Group sales generally account for two-thirds of total net revenue at Intel. Alternatively, Other Intel Architecture has, on average, generated a mere 8% of annual Intel revenue over the past three fiscal years that do largely coincide with calendar years at the company. All recent data out of research firm Gartner have confirmed the secular contraction of the personal computer market. According to Gartner, global PC shipments declined by 8.6% through calendar Q3 2013, upon a year-over-year basis.
On October 24, 2013, Intel stock closed out the trading session at $23.78 per share. This performance did calculate out to roughly $120 billion in market capitalization. Intel may close out this 2013 year with $10 billion in earnings on the books, which would mean that the stock is now trading for 12 times earnings. This valuation is too high a price to pay for a business lacking prospects for real growth. Going forward, Intel share prices will stagnate, while the company returns larger and larger percentages of capital back to investors in the form of stock buy backs and dividends. Intel deserves a sell rating.