The Intel Resurgence

Jun.27.14 | About: Intel Corporation (INTC)

Summary

Intel's stock resurgence reflects a change in its PC and mobile strategy that has yet to be communicated to the Street.

New, more aggressive x86 PC strategy.

Increased leverage of 22nm fabs.

Prospect of Apple partnership with mobile Atom exit.

Intel's (NASDAQ:INTC) recent upside move in its stock is a likely indicator that it has finally made changes to its core strategy that will lead to more profitability and aligns both mobile and foundry to its core strengths. CEO Brian Krzanich, now a little more than a year into his new role, appears to be redefining what mobile means to Intel and what their leading edge process technology can do while avoiding the trap of the heavily commoditized mobile tablet and smartphone markets primarily running Google's (NASDAQ:GOOGL) (NASDAQ:GOOG) ubiquitous Android. Ironically, profitable partnerships still lay on the horizon if the company is savvy enough to break free from cheap mobile, which it appears it is in the process of doing.

Apple's (NASDAQ:AAPL) recent launch of its $1099 iMAC with a mere 1.4GHz Core i5 processor is a game changer, believe it or not. It signifies Intel's willingness to leverage its high performance Haswell processors into lower cost regions of the market without using the Celeron Brand. Here, I must be clear that the "lower cost" is still well above that of mobile Atom chips.

It is obvious from the recent news reports of $35 smartphones and $50 tablets that the basis for this market are $5 ARM (NASDAQ:ARMH) chips from the many chip vendors located in China. This is where the market has been heading for the last two years and yet Intel under Otellini and current CEO Krzanich have never communicated that this was off the table until the recent partnership with Rockchip. Reading between the lines, the partnership was arranged for Intel to exit the market that eats away at Intel's profitability even before it has become a significant player. On the PR front, Intel has provided a face saving exit that it desperately needed.

Intel's best bet has been to go down market (within its PC borders) with its core processors pushing Apple's Mac Air and iMac closer to the iPad in terms of pricing. With its 22nm Fabs running at very high yields and mostly written off, it is now extremely easy for Intel to continue cranking out Haswells at costs that would surprise many. The key to the change in focus and policy was for Intel to stop worrying about saving face with selling Haswells not marked as Celerons way below $100 but still generating greater than 60% gross margins.

While many analysts focused on the 14nm delay and its possible impact on Intel's competitive stance, the truth is that AMD (NYSE:AMD) is no longer a threat and therefore, no skin is lost entering the market 6 months later. In addition to Haswell, 22nm server chips now will ramp, which will carry the day in terms of margins and cash flow. Expect CapEx investments to be right sized to the new market opportunities. Wall Street will likely cheer.

Little understood by analysts or investors is the fact that Intel has always operated as a one-product company that spins out dozens of derivatives. Desktop, mobile and server chips originate from one common core. This leads to ramping of millions of units quickly and this is key: at incredibly high yields. Every time the company tries to implement a new core and split the markets, it fails. This occurs often and it is why Atom is not the future. Broadwell is well designed to continue the one core processor for all markets and selling from $30 to $6000 depending on number of cores, cache sizes, performance and power.

In July, we are likely to hear Intel discuss their new found PC and tablet growth triggered by the new x86 business model that leverages their core processors (Haswell and Broadwell) to the hilt and de-emphasizes mobile Atom. The true icing on the cake then would be for Intel to start building Apple Processors. With a little humility, Intel would see that a 40%-50% margin foundry business for Apple would bring not just stability, but long-term growth and another high volume chip, which is what their business model has done so well since its early days.

If Intel continues to execute on its new strategy of enabling cost reduced PCs, a robust server platform and foundry for Apple, then I believe the markets will let up both a sigh of relief and a cheer.

Disclosure: The author is long QQQ, AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.