A 1965 paper written by Intel (INTC) founder Gordon Moore theorized that:
The complexity for minimum component costs has increased at a rate of roughly a factor of two per year.
Years later, Moore went on to speculate that the number of working transistors that could fit upon one particular integrated circuit would double every other year. Ironically, Moore's Law was to ultimately baffle engineers and executives at both Intel and Microsoft (MSFT). The Microsoft-Intel twin engine of the personal computer market has sputtered along, while consumption patterns shift towards mobile. Microsoft and Intel are often dismissed as fast followers behind Apple (AAPL), Google (GOOG) and Qualcomm (QCOM).
On October 26, 2012, Microsoft launched its Windows 8 operating system in conjunction with the Surface tablet. Microsoft designed the original Surface machine to bridge technical gaps separating traditional tablet and laptop features. In retrospect, the Windows 8 - Surface tablet movement failed, as Microsoft was to take a $900 million Surface RT inventory charge during its fiscal Q4 2013. Wayne Williams and Beta News went on to rip Surface sales as "pathetic." In response, Microsoft engineers went back to the drawing board with an attempt to polish up Windows 8.1 and Surface 2 upgrades prior to the 2013 Holiday Season. Intel shareholders, however, will not realize any real gains from this latest Surface 2 rollout.
Microsoft Surface Pro 2 Specifications
Panos Panay, Microsoft Surface VP, talks up the Surface Pro 2 tablet as a "beast" that offers the "full power of a PC." Be advised the Intel Core i5, or Haswell, processor line is the engine that drives both the Microsoft Surface Pro 2 tablet and the Apple MacBook Pro. Also bear in mind that numerous outlets have described the Windows 8.1 operating system and its associated Surface 2 tablets as "compromises." Intel marketing strategists generally refer to Windows 8.1 hardware as "2 in 1" machines that may convert into both high-powered tablets and basic laptops. In either scenario, the Microsoft Surface 2 Pro may confuse the marketplace. Coveted high-end consumers are therefore likely to remain faithful to the familiar Apple ecosystem.
Microsoft Surface Pro 2 tablets start at $899. The Surface Pro 2 tablet has been engineered in accordance with similar dimensions to the original Surface and entry-level Surface 2. Weighing in at 2 pounds, the Surface Pro 2 stands 10.81 inches tall by 6.81 inches wide. A range of Surface Pro 2 covers are sold as accessories that can click into the machine for touch and classic keyboard typing. The Surface Pro 2 kickstand has been improved to also include an additional 55-degree setting for more comfortable use as a laptop. The Surface Pro 2 tablet may convert into two separate front-and-back 720p HD cameras. Microsoft claims seven to fifteen days' worth of idle battery life for the Surface Pro 2, which Jeff Atwood and Coding Horror would still promptly rip as "terrible" performance. An October 21, 2013 report out of AnandTech benchmarked Microsoft Surface Pro 2 web browsing battery life with a 6.68 score. Competing Google Nexus 7 and Apple iPad 4 tablets tested out at 12.23 and 9.48 scores, respectively. When compared against ten other tablets, the Microsoft Surface Pro 2 only outperformed its Surface Pro predecessor, in terms of battery power.
Premium Surface Pro 2 tablets arrive packed with 8GB RAM in memory and 512GB in storage. This Surface Pro 2 tablet retails for $1,799, but does also include 200GB worth of additional SkyDrive cloud computing alongside one free year of unlimited Skype Wi-Fi minutes. Interestingly, a 13-inch MacBook Pro featuring 8GB memory and 512GB of built-in storage also retails for $1,799. The Intel Haswell CPU is nearly identical between the Surface Pro 2 and MacBook Pro. The MacBook Pro does feature HD 5000 graphics, as opposed to HD 4400 Surface Pro 2 specifications. Although differences in resolution are relatively minor between the Surface Pro 2 and MacBook, the HD 5000 upgrade does facilitate more efficient power consumption out of the Apple laptop.
The Hybrid Market
Again, Microsoft, in its attempt to design Metro as all things to all people, will end up pleasing nobody. At best, Intel will deal with profit cannibalization, if consumers actually do opt to purchase Surface Pro 2 tablets, as opposed to the MacBook. For Intel, the worst-case scenario would be for the Microsoft Surface Pro 2 to suffer through an unceremonious launch and weak sales results, while Apple makes improvements to its ARM (ARMH) based A-Series chip set. Apple recently unveiled the first 64-bit smartphone chip, in the A7, as a component part of the iPhone 5S. Going forward, operations man Tim Cook may attempt to execute the once unthinkable move in replacing MacBook Intel Haswell chips with Apple A-Series microprocessors. The late Steve Jobs, of course, largely built the Apple Empire off vertical integration.
On October 30, 2013, research firm IDC released its latest report summarizing the tablet market through the third calendar quarter. IDC officials said, "Windows tablets continued to struggle to win over consumers," through calendar Q3 2013. In terms of unit shipments, Microsoft failed to establish itself as a top-five vendor atop a leader board that included Apple, Samsung (GM:SSNLF), Asus, Lenovo (OTCPK:LNVGF), and Acer. Taken together, Apple and Samsung combined for 23.8 million Q3 2013 tablet shipments, which was exactly half of the tablet market. Year-over-year sales growth at Apple remained flat, while Samsung increased tablet shipments from 4.3 million units to 9.7 million units between Q3 2012 and Q3 2013.
At the bottom of the tablet vendor heap, IDC was to include Microsoft alongside Dell (DELL), Hewlett Packard (HPQ), and Amazon (AMZN), as "Others." "Others" did claim a 35.3% share of the Q3 2013 tablet market. Be advised, however, that fifth-ranked Acer only shipped 1.2 million tablet units during this same timeframe, which did calculate out to merely 2.5% in market share. Intel Windows Bay Trail and Surface Pro 2 Haswell tablets are both at risk of being undercut by the Amazon Kindle. Similar to Google, the Amazon business model often calls for it to retail product at cost, in order to drive traffic towards higher-margin online commerce. The Kindle Fire begins at $139. The Washington Post, now owned by Amazon founder Jeffrey P. Bezos, recently described the tablet market as "very crowded."
The Bottom Line
Over the long-term, Intel shareholder returns are likely to stagnate due to both Moore's Law and the Law of Large Numbers. A far from revolutionary Surface Pro 2 machine will fail to budge the needle at Intel, which has averaged $44.7 billion in annual revenue over the past five years. Of this amount, the PC Client Group has historically generated roughly two-thirds of sales at Intel. Intel includes mobile chip sales within its Other Intel Architecture operating segment. Other Intel Architecture has stalled out at high single-digit percentages of total revenue for several quarters. Meanwhile, all recent reports out of research firm Gardner have confirmed a secular shift of consumer dollars out of the personal computer and towards mobile. Gartner last estimated that global PC shipments declined by 8.6% through calendar Q3 2013. Be advised that Intel fiscal quarters and years generally coincide with calendar year time.
On October 30, 2013, Intel closed out the trading session at $24.50 per share, which does calculate out to roughly $125 billion in market capitalization. Intel is largely on pace to close out this 2013 fiscal year with $10 billion in net income. Intel is therefore now trading for 12.5 times current estimated earnings. This valuation is somewhat expensive, especially when Intel has failed to meet its own projections for "single-digit" revenue growth through 2013. Intel revenue and net income have actually declined by 2.5% and 18%, respectively, through the first three quarters of this year. Net income will continue to decline, if aggressive R&D spending at Intel fails to help the company establish a beachhead in mobile. Towards that beachhead end, Microsoft Surface Pro 2 tablets will be of little to no use.
Going forward, Intel investors can expect this company to return larger percentages of capital back to shareholders, in the form of dividends and stock buybacks. Financial managers, by their actions, have already declared that Intel is a mature company with few growth opportunities. Consumer staples stocks, such as Coca Cola (KO) and Altria (MO), offer more favorable risk versus reward profiles for conservative investors when compared against Intel and other Silicon Valley positions.