In 2006, AMD and Intel (INTC) were neck and neck in providing microprocessors for personal computers ("PC's") with Intel running 51.6% of the computers and AMD 48.4%. At that time AMD had been steadily gaining share since early 2004.
How quickly investors forget. Today AMD is struggling to find a market and re-invent itself while Intel is making a lot of money in PC's. Investors think Intel "missed mobile" and maybe it did. What it did instead was add 22% of market share in PC's shipping chips for almost 500 million more devices since 2006 than it would have shipped if it just held share. At average revenue per PC of about $120 that decision added $60 billion in revenue at something like 90% gross margin, an outcome not to be sneezed at. In fact, the incremental revenue from PC processor share gains by Intel between 2006 and 2010 exceeded all of Qualcomm's revenue during the same period. Intel did not miss mobile, it just ignored it.
Intel's record of taking the lion's share of its target markets is pretty impressive. Between 1980 and 1990 Intel went from no presence in PC's to an 80% market share. Between 1990 and 2000 Intel went from no presence to an 80% share of the Data Center market and later in just ten years from its entry in 2000 did the same thing in high performance computing.
Source: IDC, Gartner, estimates
Now the pundits are speculating that Intel will fail in mobile because ARM Holdings (ARMH), Qualcomm (QCOM), Samsung (OTC:SSNLF) and Taiwan Semiconductor (TSM) have already established themselves solidly in control of those markets. Maybe, but a solid lead has not helped any of the other competitors who faced Intel in markets they once seemed to dominate. In PC's names like Commodore, VIC and Atari have all but disappeared and many younger people have never heard of them. IBM's and Motorola's efforts to establish RISC based Power PC processors in the PC market died on the vine with even staunch Power PC supporter Apple eventually abandoning Motorola processors for Intel chips in Macs.
Competing with RISC processors is not new to Intel and the device manufacturers who have turned over the development of the key components of their devices to ARM, Samsung or TSMC run some risks if those suppliers cannot keep pace with Intel's advances.
It took Intel from 1981 to 1984 to reach 15% of the PC market; from 91 to 94 to reach 15% of the data center market; and, from 2000 to 2003 to reach 15% of the High Performance Computing market. This year it expects to have 15% of the tablet market.
Intel is correct to focus on tablets as opposed to smartphones. The entire smartphone market for microprocessors is small at about $20 billion based on a $17.50 units price and something like 1.2 billion this year or next, using the 2012 Apple A6 processor as representative of a smartphone processor's value. Absent a compelling integrated base band on an integrated SoC Intel is not really in position to tackle smartphones at this point any way.
Tablets make a lot more sense than smartphones as a target market for Intel. I see the Bay Trail processor as fully competitive with tablet alternatives and relatively few tablets have built in cellular connectivity. As at last May only 12% of tablets in the United States had cellular according to reports. Tablets without cellular are a target market of some 250 million devices in 2014 I would guess, and Intel's plan to ship at least 40 million processors into that market is a meaningful 16% share. I would be very surprised if they failed and I expect them to surpass their target.
2014 is about the third year of Intel's serious efforts to penetrate tablets and a 15% share is essentially in line with the progress Intel made in penetrating its earlier targets, ultimately becoming the major player in each of them.
Once Intel is firmly established in tablets, you can expect to see them shift more forcefully towards the smartphone market. By that time, users are more than likely to want higher processing power following the trend kicked off by Apple with its A7 64-bit processor in its iPhones and iPads. Processing power is Intel's playground so this will be a war worth watching.
Intel's decision to support Android as well as Windows OS from the get go is a key feature of its approach. By having processors that can run in all major OS environments, you can expect to see Intel playing a major role in Windows and Mac PC's, Android Chromebooks, Android and Windows tablets (and a long shot potential of Apple if Apple decides it needs an Intel processor in the new and larger iPad rumored to be on the way), and the full range of hybrids and two-in-ones currently in the market.
I see signs the PC market is making a bit of comeback which should be a tailwind for Intel. Gartner forecasts that 2014 sales of PC's will total 278 million in 2014, a drop of 22 million from 2013. Offsetting that drop is a forecast increase of 22 million hybrid and clamshell ultramobiles the bulk of which should be x86 devices with either Intel or AMD inside.
Gartner sees Windows based devices reaching 360 million in 2014, an increase of 32 million from 2013. Some 20 million of the increase is likely to be Windows OS phones and a few million will be Windows RT tablets, but the implication is that Windows OS computers will also grow and the majority of those will have "Intel inside".
Gartner also sees growth in Android tablets and Chrome books, both where Intel is now well represented with Bay Trail chips. Gartner forecasts growth in iOS and Mac OS units as well, and the Mac book portion of that growth will very likely have Intel processors.
My personal view is that the Gartner forecasts are optimistic with respect to smart phone where I see signs of slowing markets, but reasonable in respect of the other device categories.
In any event, 2014 will be a bit of a transition year for Intel. Stable PC markets and a 40 million unit penetration of the tablet market are important markers for investors. By year end we should see some evidence that Intel is making serious inroads into tablets and announcements that its new integrated SoC for smartphones with on board and state of the art RF components will be shipment ready in early 2015.
If we do, I believe we are on the eve of another round of Intel showing just how well it can compete when Intel management takes a serious run at a market. Evidence of success will very likely see the stock market taking a more bullish view of Intel shares, so I am long the stock holding calls on 60,000 shares.