One of my readers recently posted the following very interesting comment on my recent piece, "Intel's CES Keynote: That's Nice, But...",
Well, I am not very interested in mobile so BK was on target for me. Playing from behind to capture a fractional market share of low margin product is not an exciting investment thesis. So all the stuff about phones is history and irrelevant to me. I realize this sounds dumb to most people, but I think the 3rd world will take over the manufacture of these devices long term. There's no future there.
While I certainly find this viewpoint interesting (and this is not the first time that I've heard this argument), I think that it misses the entirety of what Intel has always been about.
Smartphones Will Be Commodity - So What?
Intel's (NASDAQ:INTC) PC chip division is on track to do $33 billion in sales at a whopping 35% operating margin. I don't know about you, but this is one of the best businesses that I've ever seen, and certainly the most lucrative semiconductor business that I've ever seen. TSMC (NYSE:TSM) and Qualcomm (NASDAQ:QCOM) only wish they could sell $33 billion worth of chips and turn in that kind of margin.
But guess what? PCs are incredibly low margin. Just ask ASUS, Dell or HP (NYSE:HPQ) what the margins for your typical piece-of-crap $399 notebook PC, and they'll probably tell you something along the lines of 5%. Heck, PCs are almost assuredly lower margin than the vast majority of tablets and smartphones sold today.
However, people make a pretty critical mistake in assuming that because PCs themselves are "low margin" that the component vendors can't make good money. That's really the crux of the whole issue: Intel sells chips, not end devices, and over time as various chip markets mature and the space consolidates, the gross margin profiles for those spaces tend to be okay.
Intel Cannot Afford To Lose Mobile
Intel is, first and foremost, a computing company. They make their money by developing best-in-class chips on state-of-the-art manufacturing technology at a favorable cost-structure that nobody else can match. This is what drove dominance in the PC market, this is what helped take Intel's server market share from 0% to 95% today (and growing...), and this is what is helping Intel make real inroads in networking/communications infrastructure/storage.
It is my argument that Intel simply cannot afford to "lose" in the mobile market. Yes, the growth in data-center is nice, but this growth is offset by declines in the PC market. While the PC market is showing signs of stabilization (as tablet cannibalization comes to an end), the long-term growth rate for this business probably won't turn out to be more than a couple of percent per year (if we're lucky).
No, the future of computing is mobile, and even Intel agrees with me, given how they have increased spending in these key, mobile-focused areas:
The more important point, though, is that even once the cannibalization of PCs by tablets subsides, tablets and phones represent much higher growth opportunities. Further, this is a large market (Qualcomm's 50% share of the mobile apps processor market and 60% of the cellular baseband market tends to imply a TAM of ~$35B), which means that there's plenty of room for Intel to meaningfully grow from its $53 billion/year revenue base.
The PC market is boring and revenues on the decline (although stabilization and return to modest growth seems to be in the cards), and while the data-center market is in great shape and growing, it has been serving to mostly offset the declines seen in the PC market over the last few years. Intel won't be set to grow meaningfully until it can get its foot into the mobile door via both smartphones and tablets. Once it does, and if the PC stabilizes, then it's off to the races and investors will make a lot of money. However, don't underestimate just how important success in mobile really is. High end computing is already coming to the palm of our hands, and if Intel can't get a big piece of that, then it will have failed as a company and won't be worth your investment dollars.