Yesterday I was having one of my never ending discussions about stocks and investing. My friend got me all spun up about how Intel (NASDAQ:INTC) MISSED the mobile business! I tried to explain that they really didn't "miss" the mobile business; they simply took a different route in the mobile business. Nope, I was wrong, they missed it!
So, let's compare. Let's take a look at the relative performance of the Qualcomm (NASDAQ:QCOM) mobile chip operation (QCT group) and the Intel data center business group (DCG). Qualcomm is arguably the leading non-captive supplier of mobile Application Processors (AP) and Intel is recognized as the leading supplier of data center server chips that enable the Qualcomm (and everyone else's) device mobile chips.
Below is a comparison of the operating earnings of the two divisions described above:
|Sales Q4 FY 2013 QCT MM$||Operating Income||Operating Income %|
|Sales Q4 2013 DCG MM$||Operating Income||Operating Income %|
OK, now let's pretend that these two business units were stand-alone businesses. We will do that by prorating the shares for the "pretend" stand-alone companies based on the ratio of division sales to top line sales for each operation.
|Sales Q4 GY 2013 MM$||Operating Income||Shares Billion (Yahoo)||OI/Share|
|Sales Q4 2013 MM$||Operating Income||Shares Billion (Yahoo)||OI/Share|
There are the numbers. Which pretend company would you rather own? Should Intel have gone after the device mobile chip business instead of the data center server chip business?
Intel and Qualcomm each invested about a decade, maybe more, in developing each company's mobile business, based on each company's unique strength; Intel's in computing chips and Qualcomm's in cell phone base band chips. The correct way to look at this competition to date is that the two companies have been complementary to each other with Qualcomm developing device mobile chips and Intel developing the data center infrastructure chips to support the Qualcomm device chips.
Now the two companies are competing directly with each other. There is no threat from Qualcomm to the Intel dominance of the server chips. There is, however, a serious threat from Intel to the Qualcomm position in mobile device chips.
The two companies have come to this point in mobile chips from 180 degree opposite backgrounds. Intel has been focused on computing chips of the highest performance with no urgent concern about power consumption. Qualcomm has come at the mobile chip business using the ultra-low power ARM (NASDAQ:ARMH) core processors. ARM's motivation since its founding days has been to provide computing cores of ultra-low power, but low performance. Neither company could have done what the other company has done because the technologies are very different.
As the smartphone phenomenon progressed, both companies prospered in different ways. Qualcomm had the advantage in device mobile chips through communication protocol patents and Intel had the advantage in the infrastructure for mobile through decades of experience in high performance computing chips.
So, to say that Intel "missed" the mobile business is ridiculous.
Now the two companies are competing directly on device mobile chips. Intel started several years behind in power consumption and functionality, particularly in LTE baseband chips. Intel is closing the gap in both power and level of integration.
Tablets will be the first skirmish. The current disadvantages of Intel are less obvious in tablets. Most tablets don't need baseband functionality and Intel has the advantage of dual compatibility with Windows and Android. Power consumption and functionality of Bay Trail compared with the best Qualcomm AP is about a draw. Later this year Intel will have superiority in APs and pull even with Qualcomm in LTE after the release of the Intel XMM 7260 multiband LTE chip. Then the smartphone battle starts in earnest.
The battle will continue for another couple of years, but Intel will have the clear performance and cost advantage at 14nm. Eventually Qualcomm in mobile chips will suffer the fate of AMD (NYSE:AMD) in CPU chips.
The more serious competitor in device mobile chips is Samsung (OTC:SSNLF). Samsung has a large captive business and the Apple (NASDAQ:AAPL) foundry business, which equates to nearly half the business.
The first step to de-fanging Samsung will be to get the Apple business out of there. It almost doesn't matter whether it goes to Intel or TSMC (NYSE:TSM) as long as Samsung loses it. My personal opinion is that it would be a mistake on the part of Apple to not persuade Intel to take the business.
There was a cryptic exchange with Intel CFO Stacy Smith on Fox Financial News on Thursday after the earnings release. Smith was asked in an interview whether Intel would ever get the Apple foundry business. He replied, "You will have to ask Apple about that." That answer is subtly different from past Intel answers to the same question and typical of some suppliers who already have Apple business.
The bottom line is Intel didn't lose the device mobile chip business; they are still grinding away on it.
Intel is still a buy and 2014 is the year.