OK, readers, here are takeaways from Seeking Alpha's Intel (NASDAQ:INTC) permabull.
I thought the meeting was very positive until the last segment with CFO Stacy Smith. Mr. Smith informed us that 2014 would be flat to down. Gross margin would be down a couple points as well.
During the presentation we learned about "Contra-Revenue " amplifying the loss in the mobile business segment even though they repeatedly told us they would sell parts into 40 million tablet computers in 2014. So, what is contra-revenue? Contra-revenue is where you give away 40 million Baytrail chips in order to gain some tablet market share. I'm not kidding, you can listen to him yourself. Now figuring a Baytrail might average $20, give or take, the 40 million "samples" is worth about $800 million. The cost of these parts would be another $400 million for a total loss of $1.2 billion. This approximates the gift that Intel will be giving to tablet manufacturers. Now, to us mere mortals, this is some real money; to Intel it is the ante to participate in the tablet business. In all likelihood the Baytrail business will stick in year two, when customers actually pay real money for the parts. The benefit to Intel is that they will show some measurable market share in tablets (mobile) and have a reasonable answer for analysts to the inevitable questions about the mobile business market share. Crazy, huh?
Actually, this is not as bad as I've made it sound. In the early days it was tradition in the semiconductor business to quote prices that were below cost knowing that the progress of Moore's law would quickly reduce product cost to the point that the business would become profitable, oftentimes even before volume shipments were made. Funny business.
Stacy also took us through a detailed explanation of factory utilization rate. The bottom line of this was that Intel is running at about 80% of capacity, which is the historical desirable utilization rate. That would be just fine if it weren't for those two cavernous new fabs in Washington and Arizona. These two fabs represent as much capacity as the entire present capacity, yet, since they are not yet producing anything, they could not be considered as "capacity" in the real sense of the word. If these fabs were in production ready, total capacity would be 2X and, therefore, capacity utilization rate would be 40%, give or take. The Ireland and Israel facilities are not yet entirely production ready either. So, the real utilization rate, taking these soon to be ready fabs into consideration, would be a very small number. That leaves my contention that Intel has enormous real or short-term potential capacity intact. I wonder what it will be used for.
These aren't lies; Stacy can't call Contra-Revenue "bribes," and he can't count non-productive assets as genuine "capacity." I just wish he wouldn't work so hard to convince us earthlings of this nonsense.
In dealing with revenue growth, Intel management can only deal with known business levels. If they knew they would be buying a business that would add 35% to revenue, they certainly couldn't discuss it in the investor meeting because it doesn't exist yet.
For me, Bill Holt's presentation was mesmerizing; every shrink since 130nm has required basic materials breakthroughs by Intel to achieve. As I've said before, if the idea of connecting a billion and a half transistors on a thumbnail size chip of silicon and make the thing work doesn't tickle you….you have no soul!
Does anyone out there think that being able to run Microsoft Windows, Apple OSX, Android and Google Chrome is an advantage to x86 architecture? Can ARM do that?
On the investor side of things, I see four developing new businesses for Intel; 1. Foundry 2. Mobile 3. Security 4. Memory. These businesses will all be additive to the current business.
There is a new openness regarding the foundry business. If Intel did everything exactly right, they might expect to eventually develop foundry business at about 25% of what TSMC (NYSE:TSM) does. That would be about $4 billion revenue. That would be huge business to most companies; to Intel it is just "good" business. Apple (NASDAQ:AAPL), at 200 million $20 chips, would be another $4 billion. Apple/Intel makes huge sense to me, but I must be alone in that belief.
Half of the mobile business is sitting at Samsung (OTC:SSNLF), one third of it going to Apple and two thirds of it captive to Samsung products. What is left is about 500 million units at $20 (optimistic) or $10 billion total business. About half of the investor meeting was dedicated to convincing us that Intel will win a significant piece of the mobile business, and I'm sure it will. If Intel attacked it like a junk yard dog, it might come away with about $5 billion.
The promise of movement on security has increased since the advent of Haswell. End to end security was discussed several times during the investor meeting. A couple of times the "end to end" was clarified as meaning, "from hardware to comprehensive software." Including these hardware aspects of security is something that no software-only company can provide.
The McAfee security subscription is priced at $80 per year, but it is ridiculous to assume 100% adoption of an $80 per year security package. Let's figure a fully developed $10 average per year per installed computer. I'm guessing there are about 1.5 billion PCs in use today (not to mention mobile computing devices), $10 average in security revenue per PC would add $15 billion of high margin recurring business to Intel revenue.
Unlike Foundry and Mobile, Software and Services (Security) will break even in 2013 and be profitable in 2014.
Both Diane Bryant and Stacy Smith spent a significant amount of time on memory. Diane told us that Intel is the number one supplier of solid state drives to the data center business. She also mentioned that Intel is working on "other non-volatile memory technology." Memory comments start at the 50 minute point.
Stacy described this business both as "NAND" and SSDs and indicated that the business level was multiple billions of dollars and hundreds of millions of dollars of operating profit. Memory comments begin at minute 42.
So, Intel IS IN THE MEMORY BUSINESS and already owns the data center SSD business. What's the next step for memory? Everything from client PCS up to the data center is the correct answer.
In order to make a mass move from HHDs to SSDs the price for SSDs has to come down to $.50 per GB for a 256GB SSD. That would produce $128 in SSD revenue per processor chip, give or take (I like that "give or take" thing.) Fully developed that is over $38 billion in semiconductor revenue to Intel.
Again, unlike Foundry and Mobile, Memory (SSDs) is profitable and expected to grow at 50% in 2014.
So, here's how the large real or potential businesses look to Intel:
|Business||Potential Revenue||Approximate Gross Margin||Approximate Operating Margin|
|Foundry||$4-8 billion||40-50%||20-30% ($.8-2.4 bil)|
|Mobile (Smartphone)||$5 billion||30-40%||15-20% ($.75-1.0 bil)|
|Security||$15 billion||70-80%||50-60% ($7.5-9.0 bil)|
|Memory||$38 billion||50%||30% ($15 bil)|
Isn't it interesting that analysts spend virtually all their time asking questions about the two least promising businesses?
Security and Memory segments are further along in their development than the two segments with higher "cool" factor, yet analysts pay utterly no attention to them.
Successfully executed, these four businesses represent over $60 billion worth of new business to Intel.
As I've suggested in a previous article , I think there is good reason to believe Intel will buy Micron and then dedicate at least one of the new monster fabs to some kind of non-volatile memory production that will be aimed at owning the low cost client solid state drive business. I further believe that Micron will be bought with Intel stock at a price that will be significantly accretive to Intel earnings.
Intel is pushing a very broad front of initiatives with all the technical and financial power at its disposal.
Those with vision will begin buying the stock while it is cheap.
Disclosure: I am long INTC. 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.