Shares of chipmaker Intel (NASDAQ:INTC) have gained some momentum over the past three months, rising close to 5%. Intel's rise has been helped by solid first-quarter results, where it beat Wall Street's expectations and announced that it was looking to gain market share in tablets. More importantly, Intel seems to be doing well amid a decline in the PC market, as its revenue increased slightly year-over-year in the previous quarter. Additionally, Intel's outlook was also quite positive and came in ahead of estimates.
The tablet market is slowing down
Hence, Intel seems to be on the right track, and its move into tablets could be a game-changer going forward. However, investors shouldn't get too hopeful. Intel will face serious competition from Qualcomm (NASDAQ:QCOM) in the tablet market. In addition, the tablet market's growth is expected to slow down drastically, if we are to believe IDC and Morgan Stanley.
According to Morgan Stanley analyst Katy Huberty (as reported on ZDNet) --
Morgan Stanley analyst Katy Huberty said in a research note on Sunday that the investment giant is lowering its tablet growth forecast by more than half - from 26 percent to 12 percent - for 2014.
The reason? Mostly due to the "lack of new, differentiated products," she wrote.
Although the slowdown in tablet growth might help the ailing PC market, its global PC market estimates remain unchanged, down by 5 percent this year and the year after.
Additionally, IDC had also forecasted a slowdown in the global tablet market, stating --
According to the International Data Corporation, Worldwide Quarterly Tablet Tracker, the total tablet market, inclusive of both tablets and 2-in-1 devices, is forecast to grow 19.4% in 2014, down from a growth rate of 51.6% in 2013. IDC reduced the 2014 forecast by -3.6% from its previous projection to 260.9 million units worldwide. The reduction in the short-term forecast was due to slowing consumer purchases as hardware iterations slow and the installed base-particularly in mature markets-continues to grow.
Hence, these two negative reports from eminent sources are ominous signs for Intel. Although the company saw an incremental increase in mobile unit volumes in the previous quarter, which increased year-over-year for the first time since the second quarter, there might be more trouble going forward. Intel shipped 5 million tablet chips in the first quarter, with plans of shipping a total of 90 million in the full fiscal year. Also, the company claims to have landed 90 design wins for Android tablets. However, if we look at the long-term picture, the tablet market is expected to slow down as we saw above.
More chips doesn't mean more revenue
Moreover, as reported by Reuters --
Intel in recent years has been slow to adapt its chips for smartphones and tablets and is rushing to catch up with mobile leader Qualcomm. Intel said its mobile and communications group had revenue of $156 million in the first quarter, down 61 percent from the year-ago quarter.
So, Intel's revenue from its mobile segment saw a pretty steep drop despite the company shipping a good number of tablet chips. Intel had shipped 10 million tablet chips in all of 2013, and even though the company managed to ship half that number in the previous quarter, the year-over-year revenue didn't increase. The reason behind this decline can be attributed to the fact that Intel is, according to Reuters:
offering to heavily subsidize manufacturers' costs to include its components in their future tablets.
Thus, in a bid to chase market share, Intel is sacrificing profits. Had the tablet market been growing, Intel would have been right in following this strategy to capture more market. However, the market is slowing down and as a result, and Intel might not be able to recoup the heavy expenditure that it is making in this area.
Intel is also going up against Qualcomm in the tablet market, and this is no easy task. Qualcomm is the top supplier in non-iPad tablets, with key devices such as Google (NASDAQ:GOOG), (NASDAQ:GOOGL) Nexus 7 2013 and Amazon (NASDAQ:AMZN) Kindle Fire HDX driving its market share. Now, even Microsoft (NASDAQ:MSFT) is reportedly going to use Qualcomm's processors in a smaller version of its Surface tablet. This would be the first time that Microsoft will use Qualcomm processors. Considering Microsoft's relationship with Intel in PCs, the choice of Qualcomm comes as a surprise.
As reported by CNET --
All signs point to the first Microsoft Surface tablet that rivals the portability of the iPad Mini. And new details leaked on Tuesday say it will run on a Qualcomm chip, while Intel powers another new entry.
A Qualcomm-powered Surface would be a first, as reported by Bloomberg. To date, the Surface and Surface Pro models have used Nvidia and Intel processors, respectively.
Maybe not coincidentally, the only other Windows RT-based tablet on the market, the Lumia 2520 from Nokia (which has been acquired by Microsoft), also uses a Qualcomm processor.
That's an important distinction because Qualcomm silicon in the Lumia 2520 provides 4G/LTE capability on both Verizon and AT&T and new the "Surface Mini" is expected to be based on RT also.
Although Intel is also expected to provide its chips to certain Surface models, it should be noted that Qualcomm might have landed the more lucrative spot. As Microsoft is looking to roll out an iPad Mini challenger, the device could be expected to be priced competitively and gain more market share as compared to the more expensive models. Hence, Qualcomm might end up being the winner once again.
Intel's move into mobile sounds good on paper, but the company is facing some serious challenges. Due to the slowdown of the tablet market, Intel's questionable strategy, and stiff competition from Qualcomm, it won't be surprising if Intel's mobile initiative fails.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.