In a 1965 technical paper, Intel (NASDAQ:INTC) co-founder Gordon Moore wrote: "the complexity for minimum component costs has increased at a rate of roughly a factor of two per year." Over time, Moore's Law evolved to conclude that the number of transistors that could fit upon one integrated circuit would double every eighteen months. In laymen's terms, computers would become increasingly powerful, yet significantly smaller over time. Ironically, Moore's Law materialized to wreak havoc upon the Intel business model. Intel has been thoroughly shut out of the secular shift away from the personal computer and towards mobile devices. As such, Intel investors should promptly dump shares and never look back.
New Intel Business Classifications
Be advised that Intel fiscal years largely coincide with calendar time. Prior to 2014, Intel classified its business units according to PC Client, Data Center, Software and Services, and Other Intel Architecture operating segments. In broader terms, low-power consumption products were defined as Other Intel Architecture. More specifically, Other Intel Architecture was then an umbrella category that included system, tablet, netbook, and smartphone chip sales. As such, the operating segment classifications made for somewhat difficult analyses of Intel mobile performance.
Still, Other Intel Architecture accounted for a then 8% of 2013 net sales. For 2013, Other Intel Architecture posted $2.4 billion in losses off $4.1 billion in revenue. The unit deteriorated sharply between 2011 and 2013, despite the fact that Intel had thrown $29.1 billion into research and development over the three-year time frame. For 2013, Intel had plowed 20.1% of net revenue ($52.7 billion) into research and development ($10.6 billion). The aggressive capital spending, however, has yet to materialize as real growth. Intel, of course, has historically relied upon a declining PC industry to generate two-thirds of company revenue.
On April 25, 2014, Intel filed financial results for its fiscal 2014 first quarter ended March 29. Intel then took the time to reorganize its operating segments according to PC Client, Data Center, Software and Services, Internet of Things, and Mobile Communications groupings. In years past, Internet of Things and Mobile Communications would have been folded together beneath Other Intel Architecture. Interestingly, year-over-year Internet of Things financial performance improved significantly between Q1 2013 and Q1 2014. Intel Internet of Things did post $123 million in operating profits off $482 million in Q1 2014 segment revenue. Last year, Internet of Things accounted for $67 million in quarterly operating profits.
The breakout of Internet of Things, of course, made for even more disastrous results out for Intel Mobile. The Intel Mobile and Communications business all but collapsed over the past year. During the latest quarter, Intel Mobile and Communications racked up a staggering $929 million in losses off a mere $156 million in operating segment revenue. Intel Mobile and Communications did tally $404 million in Q1 2013 sales. In any event, Intel has been thoroughly shut out of the mobile market. Intel's "mobile edge" that former CEO Paul Otellini once highlighted within his 2012 letter to shareholders has degenerated into an albatross. No hope exists upon the horizon.
Qualcomm, ARM, and Apple
The triangulation of data research out of comScore (NASDAQ:SCOR) and IDC, alongside the aforementioned financial results may confirm further that Intel is a non-factor within the mobile market. On May 2, 2014 comScore released its March 2014 U.S. Smartphone Subscriber Market Share report. Be advised that the title of this report is somewhat misleading. This comsScore release actually presented averages of data compiled through the first calendar quarter of 2014. A quick review of the information would highlight the presence of an entrenched Apple (NASDAQ:AAPL) iOS - Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Android duopoly above the mobile market. According to the comScore estimates, Android (52.2% share) and iOS (41.4% share) systems combined to operate 93.6% of U.S. smartphones during Q1 2014. Meanwhile, Apple and Samsung (OTC:SSNLF) were also a respective one and two as handset manufacturers. At the bottom of the heap, BlackBerry (NASDAQ:BBRY), Nokia (NYSE:NOK), and even Microsoft (NASDAQ:MSFT) are fighting daily battles simply to appear relevant within the mobile market.
Apple, of course, designs its own A-Series chips for installation within its iPhones and iPad tablets. Alternatively, the Qualcomm (NASDAQ:QCOM) Snapdragon system on a chip line has emerged as the primary engine driving the Android ecosystem. Interestingly, the Snapdragon also powers the premium mobile devices brought to market out of BlackBerry, Microsoft, and Nokia. Snapdragon and Apple A-Series chip designs are based upon ARM (NASDAQ:ARMH) architecture. The Company Overview states that ARM technologies are a part of more than 95% of mobile phones out on the global marketplace.
Last year, Intel aggressively pitched its Bay Trail microprocessors as central to the growth of "2-in-1" machines. The Intel "2-in-1" combined traditional tablet and personal computer features, and was largely associated with Windows 8 and 8.1 operating systems. In recent months, Intel and Google worked to put the finishing touches upon a partnership to rollout Chromebook computers featuring slightly more powerful Celeron Bay Trail chips. The latest line of Chromebooks will retail near the $300.00 price point. On March 27, 2014, however, Microsoft finally made its popular Office software suite available to the iPad platform. Shortly thereafter, Google mobilized to launch Docs and Sheets applications for the Apple iPhone and iPad. Intel cheerleaders must acknowledge the idea that iPad productivity software decisively undercuts the "2-in-1" movement. Apple reported sales of 16.4 million iPad units through its latest Q2 2014.
The Bottom Line
The Intel business model has been left to work itself out of a Catch-22 position where it is desperate for growth outside of a declining personal computer industry. Intel mobile has degenerated into an embarrassing failure, where even aspirations to operate as a chip foundry have crashed and burned. Going forward, Samsung and Taiwan Semiconductor (NYSE:TSM) will continue to process the majority of mobile chip manufacturing orders. Intel missed the boat on mobile - to the point where nothing can be salvaged. If anything, Intel will continue to throw good money after bad.
Intel shares did close out the May 6, 2014 trading session at $26.20, which also calculated out to $130.3 billion, in terms of market capitalization. Over the next year, Intel may suffer through a 5% decline in net income, which would project out to roughly $9 billion in 2014 earnings. At these levels, Intel therefore trades for an estimated 14.4 times current earnings. This price tag is far too of an expensive price to pay for a rapidly deteriorating business model. Intel deserves a sell rating.
Disclosure: I am long AAPL. 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.
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