Intel (INTC) suffered a roughly two percentage point drop in after hours trading yesterday. The drop was attributed to a report from Bloomberg, that Google (GOOG) "mulls plan to design chips in a threat to Intel". The article below will discuss some of the potential ramifications of GOOG entry into INTC's core market.
At first glance, the title of the article catches the reader's eye. Can this possibly be, GOOG entering into the design space of semiconductors? Naturally, you would have to satisfy your curiosity so of course you would click on to read further at this potential market moving event.
The first paragraph mentions, GOOG is interested in designing their own server processors. The server market is dominated by INTC with a market share of roughly 95 percent. To equate this into dollar terms, the server market falls under the heading of data center group with a total third quarter revenue of $2.9 billion. The beauty of the data center group for INTC is growth, as sales grew over 12 percent year to date. The gains from the data center group help offset some of the continuing sales declines witnessed in the PC client group.
GOOG's desire to chip away at INTC market share by attempting an in house customized solution should not come as a surprise. The trend towards customized designs seems to be the rage best exemplified by Apple (AAPL) designing their own processor for their flagship product, the iPhone. I really view this story as a non event and I am quite surprised the stock has sold off as much as it has. To add some context to the decline in share price, the potential move by GOOG erased roughly 2.5 billion dollars of INTC market cap.
In my view the most important development to arise since INTC analyst day is the company's willingness to open up their foundries for contract work. INTC was until the announcement, resistant to accepting any sort of foundry work for a customer using the ARM architecture. In my view, manufacturing is INTC's significant competitive advantage. Brian Krzanich the current CEO, hailed from the manufacturing group which in my view should be viewed as an indication of the path forward for the company.
INTC will face a steep learning curve as they learn to customize their foundry to meet the individual needs of their clients. This is where Mr. Krzanich's leadership will face his first major test. If he is able to get the employees to buy into the concept of not doing everything in house, the plunge in revenue will abate. Using the GOOG example above, even if they were to go in house with a new design it would have to be mass produced somewhere. I can't see any plausible scenario where GOOG will begin building a state of the art foundry from scratch. INTC would naturally have to compete for the contract which is nothing new for the company.
I am not optimistic about INTC's prospects for next year, as the PC segment continues to show declines. INTC already warned they expect flat revenues for next year, which spoiled all the positive vibes from the analyst day. To further compound the issue they expect margins to come in a bit lower. INTC is expected to post 2013 earnings of roughly $1.90 per share, with 2014 estimates ranging from $1.85 to $2. The earnings being posted by the company are very indicative of a cyclical company who has yet to see a meaningful uptick in business. I am loath to pay more than 10 times earnings for INTC especially in light of three years worth of declining profits. I will continue to follow the events involving INTC, with special emphasis on any news concerning their foundries. Thanks for reading and I look forward to your comments.
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