Intel (INTC) has long been the dominant chipmaker in the PC market. While there are other manufacturers like AMD, Intel's pretty much universally accepted as the top dog. But the reason Intel stock hasn't been doing so hot as of late is that they're stuck in the old desktop-and-laptop-PC market that nobody likes (except me). However, due to a combination of factors I'm about to outline, Intel might explode into the mobile chip arena in a very, very big way.
State of the Mobile Computing Market: Apple's Perspective
Everyone knows that Apple (AAPL) is growing sales of mobile computing devices like the iPad at a staggeringly fast rate that nobody can really wrap their mind around:
The global market for tablet computers is growing faster than expected, with Apple's iPad widening its lead as consumers' top choice, according to market researcher International Data Corp.
Worldwide shipments of tablets this year will be 107.4 million units, up from an earlier projection of 106.1 million. Worldwide shipments should reach 142.8 million next year and 222.1 million by 2016, the group said.
In fact, it turns out that Apple's only problem when it comes to selling iPads is that it can't make enough of them to meet demand. Now here's the deal: Apple's well known as one of the world's leaders in effective supply chain management, and you can bet they aren't going to let some little problem like that get in the way of their grand master plan for world domination - oh, wait, I meant to say year-on-year growth. Same general principle.
Anyway, it's no secret that Qualcomm (QCOM) supplies Apple with a whole lot of chips for iPads and such. ("A whole lot" is here defined as "a very large number.") Producing things on such scale isn't easy: Qualcomm has supply chain problems. As of June 28, 2012:
Qualcomm CEO Paul Jacobs, during a roundtable discussion at Uplinq 2012, confirmed that his company is still struggling to provide enough Snapdragon chips for its customers.
Is this an issue for Qualcomm? Why, yes, it is:
Qualcomm is clearly reluctant to take on the multi-billion-dollar challenges associated with running and maintaining its own fabrication plant - the fabless model has historically worked very well - but chip-supply problems negatively impact the bottom line and leave opportunities for competitors such as NVIDIA to shoehorn Tegra 3 technology into desirable upcoming products such as the Google Nexus 7 tablet.
While the article specifically mentions the Google Nexus 7 tablet, you have to wonder about Apple products as well. Just because a lot of iPads currently come with Qualcomm chips, you can't assume it'll be this way forever. If Qualcomm is having problems with manufacturing NOW (and has been since April and possibly earlier), what do you think it'll be like in 2016 when worldwide tablet sales have doubled?
The point here is that it's a flawed assumption to think that there isn't room for another player in Apple's mobile products supply chain. Hmm, let's think - who could this potential player be?
Hey There Apple, This Is Crazy. But My Name's Intel, So Call Me Maybe?
The obvious choice here is Intel. And it's not just me campaigning for this. From Intel CEO Paul Otellini:
Our job is to ensure our silicon is so compelling … in terms of running the Mac better or being a better iPad device, that as they (Apple) make those decisions they can't ignore us.
Maybe the idea isn't so crazy after all, for several different reasons. First and foremost: Apple already has a relationship with Intel. And Apple's shiny new Retina MacBook Pro comes with an Intel Ivy Bridge core i7. Second: seriously, who else is Apple going to turn to? AMD? That didn't work out so well last time they tried it.
While Intel has not yet made a huge foray into mobile chips, it's starting to. And the technology looks pretty impressive:
... there are problems with the A5X (the processor that powers the iPad 3). It is manufactured using 45 nanometer architecture - architecture that Intel and AMD were using for desktop CPUs back in 2008 - and over the three incarnations of the iPad the size of the die has increased dramatically. The current A5X is 310 percent larger than the A4 processor that powered the first-generation iPad.
Intel could help Apple change this. Its current line of Ivy Bridge processors is built using 22 nanometer architecture, but the company plans to have mobile processors based on this size of architecture available next year, with 14 nanometer architecture coming in 2014.
Wait, so the supposedly cutting-edge iPad 3 is powered by circa-2008 desktop technology? Ouch.
But it gets even better: Intel is leveraging its supply chain for mobile chip production. And with Intel already established as a supply chain and technology leader, it seems that Qualcomm's problems are Intel's dreams. As established in the block quote above, Intel's tech is far, far superior to what Apple's currently using.
Intel's Bet: Not So Crazy
So maybe Intel's pulling a bit of a Carly Rae Jepsen by publicly declaring that they're too good for Apple to ignore. But you know what? I agree with them. They are too good fore Apple to ignore.
Intel is betting its lead in manufacturing technology will help it win more ground from rivals, and it is speeding up the rate at which it uses its most advanced factories to make mobile chips.
While Intel's chips are already used in a select few smartphones and it can expand without Apple, I honestly don't think it's all that crazy to predict that we'll see Intel chips in Apple iPhones and/or iPads within the next few years. This would, obviously, mean huge upside for Intel.
For more analysis on why I recently bought Intel, see 8 Reasons To Load Up On Intel.
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Disclosure: I am long INTC.