Intel Inside Apple: Macs Now, Tablets Later

Jan. 1.14 | About: Intel Corporation (INTC)

Advanced Micro Devices (NYSE:AMD) is not the only one profiting from the release of the new Apple (NASDAQ:AAPL) Mac Pro 2013. Intel (NASDAQ:INTC) is also a leading beneficiary - the Mac Pro 2013 has Intel inside it. The latest Mac Pro was released last December 19 and Other World Computing (OWC) immediately tore it down. The standard $2,999 Mac Pro 2013 is powered by a 3.7 GHz Quad-Core Intel Xeon E5-1620V2 with Turbo Boost that can crank it up to 3.9 GHz. It comes with 12GB of ECC DD3 Memory, 256GB PCIe-based flash storage, and dual AMD FirePro D300 GPU.

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The $3,999 Mac Pro version comes with a 6-Core Xeon E5 and Apple is also allowing custom order options for 8-Core or 12-Core Intel Xeon E5 processors. This powerful machine is intended for professional graphic designers, 3D artists, musicians, and video editing/compositing professionals. The creative industry is where Apple Mac Pro rules.

Apple opted again to use the Xeon probably because AMD's high end processors are still years behind in terms of performance. This is not to inflame the AMD fans, I just want to let the chart on the link above speak for itself. Intel is KING of the high end x86 processor market. The Xeon E5-1620 v2 per tray price is $294. If Apple sells at least 200,000 of Mac Pro 2013, that's $58.8 million sales for Intel instead of AMD.

OWC's teardown confirmed that Apple made this latest model of Mac Pro with a removable CPU so customers can upgrade the Xeon processor on their own. This is a good thing for Intel - Mac Pro users can buy faster and newer Xeon CPUs to improve their workstation's performance if they need it.

Intel's income statement won't improve much from the sales of Apple's Mac Pro but a positive $5 or $50 million still benefits INTC investors. The thesis of this article is to show that Apple, the world's most valuable tech company, still relies on the engineering prowess of Intel. Consequently, Intel's very healthy income statement for the past 6 years is partly due to Apple's big switch to Intel x86 processors.

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Intel and Apple are BFF

INTC and AAPL are best friends forever when it comes to non-iOS products. Intel has been supplying the Xeon processors for Apple's most powerful and most expensive computer product since 2006. The first Intel-equipped Mac Pro was released in August 7, 2006. Apple released a basic Mac Pro 2006 model with a 2.66 GHz Dual-core Intel Xeon "Woodcrest". The custom upgrade options were for a 3.0 GHz Dual-Core of Quad-Core Intel Xeon "Clovertown."

The relationship extends to the Mac Mini, iMac, and MacBook. From 2006 to the current day, Apple helps Intel maintain its dominance in the x86 PC market. For seven years, Intel enjoyed a healthy income from Apple and this relationship will go on for 7 more years. AMD's inferior CPU has yet to impress the Apple bigwigs. I have yet to see a Mac with AMD CPU inside it.

If there's a dominant Wintel Alliance in the PC market, there's also an "Apptel" champion tag-team in high end computing products. Apple's desktop and laptop products cater more to the middle/upper-class buyers and professionals who need top-level performance.

Steve Jobs' resolution to abandon the PowerPC architecture in 2005 in favor of Intel x86 processors was one of his best decisions. Intel, the major chip supplier for Apple's Windows PC rivals, won Apple's trust. It wasn't AMD that Steve Jobs approached when he got fed up with IBM's tardy development of the PowerPC.

The late Mr. Jobs was right when he selected Intel because it improved the sales of Mac desktop and notebook products. The Macintosh division of Apple was worth only $6,275 million in 2005. After Apple's switch to Intel processors, the Mac division enjoyed better market reception, topping at $23,221 million in 2012.

For 2013, Mac sales are down to $21,483 million but that's due to the rise of tablets. The chart below shows how much Intel grossed from supplying its processors to Macintosh desktop and notebook computers.

My estimate for 2013 is based on a 5% of total Mac division sales, or around $1.074 billion. It could be much higher. I do not have access to the data for each particular processor in Mac Mini, iMac, Mac Pro, or MacBook for the last 7 years. The point is Intel is helping Apple make good money from its Mac division.

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The iPhone and iPad CPUs Could Have Been Intel's Too

Former Intel CEO Paul Otellini admitted that his biggest mistake was not delivering what the iPhone needed in 2007. Steve Jobs again approached Intel to request a low-power processor for the first version of the iPhone. Intel passed up on the opportunity because Otellini did not believe the iPhone would be a best seller.

Apple also wanted the chip at a price that Otellini thought un-economical. He miscalculated his forecast because the iPhone sold 100x more than everybody expected. Otellini confessed that if he knew how big the iPhone would be, Apple's asking price would have been acceptable due to Intel's superior economies of scale manufacturing. This happened when Intel still owned XScale, the ARM processor division it sold to Marvell in 2006.

Samsung supplied the 620MHz ARM processor for the first 2007 model of the iPhone. Intel again missed another big opportunity when Apple needed a low-power processor for the iPad. Jobs originally wanted a chip based on Intel's Atom but Otellini again refused the deal. Intel could not agree with the price Jobs demanded and Apple wanted too much control over the x86 iPad chip design. Apple bought PA Semi in 2008 which helped it build the iPad's A4 processor.

The point of this January 1, 2014 throwback musing is - Apple always approached Intel first for their initial iPhone and iPad processor requirements. Apple believed in Intel's superior CPU design. Intel, with Otellini at the helm, declined the iPhone and iPad deal. Otellini was graciously retired last May 2013. I believe the new boss, Krzanich, learned from his predecessor's mistake.

I daresay that some day in the future, if Apple will approach Intel again for a mobile CPU requirement - Intel will kiss ass and do everything Apple wants. Qualcomm (NASDAQ:QCOM), ARMH, Samsung, and Google all benefited greatly from Otellini's mistake. The lost revenue opportunity was and still is in the billions…

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Intel's Redemption: Bay Trail-T, Cherry Trail

The 2013 market success of the Asus T100 Transformer showed Intel has the mojo to produce low-power, affordable, and powerful tablet processors. Forgive me if I sound presumptuous, I daresay Apple should be concerned about the 2013 robust sales of Windows 8.1 tablets and 2-in-1 notebooks powered by Intel Bay Trail CPU.

The iPad sales declined this year. Intel's old PC clients are racking up good sales for their Bay Trail tablet products. This year, 2014, Intel is aiming for a 40-million tablet chip sales. Intel inside Android tablets, Intel inside Windows 8 tablets, Intel inside Chromebooks.

It won't be long before Intel inside iPads becomes a reality. History repeats itself. The majority always wins. Even if Apple has its own PA Semi, ten years from now, Intel will be the most prolific supplier of tablet processors. Intel's grand master plan is to dominate the tablet and smartphone and Internet of Everything. The 40 million tablet sales objective of Intel is realistic when $99 is all it takes to own a Dell Venue tablet.

Cherry Trail-T is arriving this year but Intel is still intent on delivering cheap Bay Trail-T $99 Android tablets. Intel will showcase its new tablet chip products this coming CES 2014 event on January 7-10 in Las Vegas.

Intel is also going all-in on this venture, offering marketing subsidies to its OEM partners. Intel is big stack: it can go all-in on every hand if it wants to. It has the money to gamble on rebates/subsidies. Moneybags Microsoft is also a willing accomplice, always ready to back Intel if its bankroll for tablets gets thin.

Bay Trail-T and Cherry Trail-T is a pair of Aces worth betting on. I'm betting on Intel too.

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Conclusion

Intel's willingness to offer marketing subsidies and rebates for its tablet PC ambition will help it gain significant market share this year. The company's grave mistake in not producing a low-power CPU for the iPhone and iPad has chastised it to be more accommodating with thin profit margins. My 10-year prediction is that Intel's 2014 and 2015 market gains in tablets will lead to it becoming a dominant player by 2016. The Tablets Now, Smartphones Later strategy is perfect.

My "technical analysis" is, Apple in the future, just like before, will probably approach Intel again to give them a cheap, low-power CPU that will make its iPad price-competitive with its Android and Windows 8 rivals. A $499 iPad will not survive long in the face of $99 Android and $149.99 Windows 8 tablets. Apple is super deep stack now but it wasn't always like that. Back in 1996, AAPL almost went bankrupt because it failed to innovate and adapt to market forces.

Intel, knowing how bad it is to turn down an Apple request, will custom build an iPad CPU…and it will be called the Apple Trail-T processor.

INTC is a BUY. My No.2 New Year's resolution is… less PokerStars grinding and more writing.

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.