The spark of the digital age was the development of the microchip that undoubtedly changed the world as we know it. Early in the 21st century we have been introduced to new computing devices like smart phones and tablets. Clever computing devices are bound to be developed with the continuation of software and processor enhancements. Today, the new tablet era is truly everywhere. Some have come to believe that the death of the PC is here. Although often exaggerated, the post-PC world causes fundamental changes in the semiconductor industry. These changes affect Intel greatly and the company's ability to navigate successfully in the digital mobile age is extremely important. The standard has been set and the mobile devices are a thriving industry. Intel (INTC) can enter this market and be successful and overcome its competitors by simply producing the best chip. There may be barriers to overcome. However, these can be broken down just as easily as they have been built up.
The new Windows 8
When Microsoft (MSFT) releases Windows 8, there will be a renewed interest in how the operating system works. Consumers could look at it and discover how different, unique, and cool it is compared to previous operating systems. Or they could treat it like Windows Vista, which we all know led to the rescue operating system known as Windows 7. Since then we have experienced cloud computing taking hold of enterprise, social media dominating consumers' internet time, and the introduction of tablets and smart phones developed by Apple (AAPL) that are extremely popular. Many analysts and bloggers these days describe this new world as the end of personal computers. For instance, Mr. Tiernan Ray on his Barron's cover titled "Bye-Bye PCs." Albeit a little late in joining the party, he puts up Microsoft and Intel as unknown factors in the post-PC world. I do agree with him that Dell (DELL) and HP (HPQ) will fade away; however, the death of the PC is exaggerated and very misleading. The mobile industry is thriving and both Microsoft and Intel need to make that transition.
An article for such a discussion of the post PC era does little to inform the average investor of what's actually occurring. Let alone the comprehensive competence needed to discuss the future of consumer and enterprise technology. Microsoft should be able to benefit from this new world with its strong software and business operations. As we drift further into a new age, I believe Microsoft's business will grow and strengthen over time. If one is interested in HP or Dell, I highly suggest reading up on Jim Chanos or a quick trip to their local website. The interesting factor here is how Intel plays into it.
Intel's Challenge: ARM Holdings not AMD
To begin with, Advanced Micro Designs (AMD) has had serious issues and missteps. I would suggest one take a very sincere and cautious approach about AMD. When people talk about ARM Holdings (ARMH) technology coming into the PC market, it will be AMD who suffers, not Intel. There is a strong argument that ARM holdings by the likes of Samsung, Nvidia, Qualcomm, and Apple will control between 80-90% of the smart phone and tablet markets for years. Intel can make at least 20-10% inroads in these areas, but will not gain anywhere without help from Microsoft, Apple, or Samsung. Intel can enter the mobile segment on its strengths in manufacturing and microchip design. The innovation and manufacturing yield on Intel's products are rivaled by very few. An example of Intel's unique advantage is exemplified by the company's dominant position in servers and personal computers. The mobile segment is currently dominated by the battery life on the devices and the availability of licensed IP from ARM Holdings that allows various companies to develop for their needs. These two factors create a huge technological advantage for ARM Holdings.
ARM Holdings are able to have their technology licensed and receive a royalty fee, which is the driver of the mobile industry and why ARM Holding's business model has been so successful. There also is the ecosystem of fabless companies and fab manufactures that work together to produce these processors. Of course, the last point here is mute currently because of the high volume experienced by many of the chip companies. However, when business slows down it won't be as highly profitable like the case was for Texas Instruments (TXN). For today's world, simplicity and battery life are key components for ARM Holdings process technology being widely used. When the world turns to the best chip design and innovation, the best chip will win and that could very well be Intel.
Intel's strengths are in the data center, storage, and cloud space where their processors are extensively used to perform high performance tasks. There will be ARM chips in the server space one day prominently in the micro server space, which may account up to 15-20% of the market by 2015. That will be a nice little revenue boaster for those who are successful. AMD may get squeezed out by Intel and ARM Holdings in the server market as well. Personal computers will benefit from global growth and enterprise well into 2015. Although in the short term demand is slowing due to the release of Windows 8, emerging markets, and the European debt crisis. The overall economic outlook is stronger after this cyclical decline in the semiconductor industry is worked through.
As tablets continue on their deflation ways through the likes of Google (GOOG) and Amazon (AMZN), there are Microsoft and Apple who are keeping prices high due to increased function and coolness of the companies' devices. If Microsoft is successful with their tablet, particularly with an Intel chip, one will wonder whether Apple will notice such a difference in consumer habits and develop an iOS for Intel. The post PC era could still be redefined by Microsoft and Intel. The futures of their businesses rely on it and are in stronger financial shape currently than most people would like to think. Opinions abound as to how the end of the PC era will doom Microsoft and Intel. I would suggest taking a humble approach to this situation. A further look into the future reveals the difficulties surrounding Intel and Microsoft. A new line of business for Intel could be manufacturing chips for smart phones and tablets as a fab for other chip companies. The return of capital here would have to be beneficial enough for them to commit. However, it would not be too difficult to get major companies to jump ship including Qualcomm (QCOM) or Apple.
Investing with confidence
Intel's strength in manufacturing, process technology, and innovation involving both manufacturing and microchip designs will increase Intel's ability to win business. Intel can enter new markets to gain ground their competitors may enter in the future. As the notion that Intel's processors are too power hungry fade away, one will have to think what is stopping a major distributor in the smart phone or tablet market from adopting their technology. Intel is developing 14nm process technology for release in the next couple years and they are spending heavily in the research of manufacturing at 10nm. There are also future revenue streams including connected cars and cloud gaming. Interesting thoughts and ideas can be found at Intel's blog and around the web.
A rebound in the global PC market by both consumers and enterprises benefit Intel greatly in revenue and profit generation. Data center growth should pick up with their new server products including the micro server segment where Atom processors are used. The mobile computing industry is starting to see Intel inside; however, no products are being shipped in the United States currently. The tablet market will be interesting to watch as Microsoft and others release Windows 8 tablets with Intel processors. The inroads have begun; I will take the baby steps, which was done because they wanted to protect their home turf in PCs and data centers. Be sure to remember that Intel will have struggles and the risks are described throughout their 10-K. I recommend one to do some diligent research and look beyond the hype of tablets and distraught feeling of PCs and see if Intel offers a compelling value to own. Thanks for reading.
Disclosure: I am long INTC.