Intel (NASDAQ:INTC) announced first quarter 2014 earnings on April 15, 2014, after the market close. The market response was a gigantic yawn, at least for now.
I won't repeat all the numbers, since they are here and the story is not in the first quarter numbers, but in longer term strategies.
The major takeaways are:
· The core client and data center are alive and strong. The client revenue was down 1% from last year. The server business was up 11% from last year. These businesses, isolated, would be $11 billion, up a couple percent, with operating income of $4.12 billion, up 13%. Nice numbers by any assessment. Again, if isolated, the client and server business would be seen to be a 75%-plus gross margin business. And it ain't goin' nowhere but up, albeit slowly. This segment is the cash generating business that the early semiconductor pioneers had in mind - only Intel delivered on the dream.
· Mobile is still an unavoidable financial disaster, for now. The good news here is that The XMM 7260 LTE has arrived and will ship in this quarter. This function is so important that we reasonably can say, "no LTE, no mobile." Leadership in LTE is directly related to Qualcomm's (NASDAQ:QCOM) success in mobile. The XMM 7260 is shipping now. The part is actually built by TSMC (NYSE:TSM) because the design started at Infineon, which used TSMC for a foundry. It will be a year before a CAT 6 LTE, like the 7260 will be moved to the Intel 14nm TriGate process. Until that time you can take it to the bank that Intel will sell the TSMC-made 7260s at blood-letting prices and will just suck the oxygen out of Qualcomm's LTE business. Then, when the LTE is built on 14 nm, the "at cost" price will instantly become a 65% business to Intel and Qualcomm has no way to follow Intel into that lost cost manufacturing environment. Crazy business, huh?
· Revenue guidance for the second quarter exceeded actual sales in second quarter of 2013 by a couple of percent. The big news and surprise is that gross margin is expected to recover to 63%. This tells me that 14nm is yielding better than expected.
My opinion is that, in the final leg, the mobile business will become a profitless business for all but Intel because of the higher total cost of the fabless business model.
At the extremes of volume, technology and pricing pressure the fabless model begins to melt.
Intel has an asset that is working every day that is never mentioned in an earnings report. That asset is the Intel Micron (NASDAQ:MU) Flash Technologies joint venture (IMFT). Intel receives NAND memory from the joint venture at cost. The NAND chips are made into SSDs (Solid State Drives). Storage Newsletter claims the client SSD business is growing at over 40% per year. Intel is involved and will continue to be involved in SSDs. This business alone could add $15 billion to Intel in the next couple of years.
In the future, with the introduction of a 256Gb NAND chip, a 128GB SSD could be made of four of these chips stacked (about the area of a fingernail) and included inside the CPU package. The power reduction and performance increase would be unmatched by any other technology.
That "compute module" would cost about $225 and be just as proprietary to Intel as the CPU chip is today. 300million client compute modules would produce sales of over $67 billion. By that time Data Center, Mobile, software and other will add over $40 billion in revenue to Intel.
Through the fog one can see an Intel well north of $100 billion in revenue, still generating 65%-plus gross margins and probably as high as 30% net margins.
If your focus is on immediate gratification in the mobile business, don't buy Intel. If you like stories that end in inevitable market dominance, buy Intel and sleep easy.
Disclosure: I am long INTC, MU. 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.