Over the last two decades, the mobile phone has evolved from a device for making calls to one that has become the central point of access to our digital lives. Integrating the benefits of a PC and offering the convenience of a mobile device, tablets took the market by storm with the launch of Apple’s iPad in 2010, and the sudden rush of devices flooding the market is proof of their increasing popularity. In light of the tough macro conditions, while the PC market growth rate has slowed down, tablets and smartphones sales are witnessing tremendous growth, which is expected to increase in the future.
Accounting for a substantial majority, Intel (NASDAQ:INTC) has been winning in the PC microprocessor market for the last two decades. However, determined to be the frontrunner in the global technology revolution and focused to stay abreast changing consumer preferences, the company marked its entry in the lucrative smartphone and tablet markets earlier this year.
While AMD was Intel’s only major competitor in the PC microprocessor market, the company faces intense competition from established ARM technology based players such as Qualcomm (NASDAQ:QCOM), Nvidia, Texas Instruments and Broadcom (NASDAQ:BRCM) etc. in the mobile computing space.
In this article, we discuss the growth potential in the smartphone and tablet market and why despite a number of significant design wins, Intel has a long way to go before it can pose a real threat to ARM’s foothold in the market.
Intel vs ARM Holdings
ARM Holdings (NASDAQ:ARMH) has been the leading player in the smartphone market for over a decade now. As of 2011, it accounted for close to 90% of the smartphone processor market and 10% of the mobile computing market (including tablets, netbooks and laptops [ARM Q4 2012 Investor Presentation, ARM Investor Relation].
While Intel and ARM are now the core competitors in the smartphone and tablet market, both have relatively different business models. ARM licenses its technology to its partners, who in turn incorporate it into their own designs to create chips for consumer devices. On the other hand, Intel uses the x86 architecture to design and manufacture its own chips.
Being a relatively new entrant in the market, Intel has only about six smartphones to its credit so far – XOLO X900 by Lava International, Lenovo LePhone 800, Android smartphone code-named San Diego, LTE Grand X IN, Megafon Mint and the recently launched Motorola Razor I. Additionally, Intel claims to have around 20 tablet design in its pipeline up for launch this year.
On the other hand, ARM technology powers some of the most popular devices and is present in a number of smartphone and tablet devices in the market. Some of the products enabled by ARM’s technology are – Apple’s iPhone and iPad, Amazon Kindle2, Samsung Galaxy Tab, Samsung Galaxy S, HTC Sensation, HTC Desire, Samsung Omnia, Asus PDA and Acer beTouch400 among many others.
How big is the smartphone and tablet market?
Research firm Gartner estimates the global sales of media tablets to increase by 98% this year, from 60 million units in 2011 to 119 million units in 2012, and reach close to 370 million units by 2016. [Gartner Says Worldwide Media Tablets Sales to Reach 119 million Units in 2012, Gartner Press Release, April 10, 2012.]
Accounting for 31% of the total mobile devices sale, smartphone shipments stood at 472 million units in 2011, a 58% increases from 2010. [Gartner Says Worldwide Smartphone Sales Soared in Fourth Quarter of 2011 With 47 Percent Growth, Gartner Press Release, February 15, 2012.] While the global mobile phone sales have registered a slight decline (-2%), smartphone sales have shown a robust growth (44%) so far this year. [Gartner Says Worldwide Sales of Mobile Phones Declined 2 Percent in First Quarter of 2012; Previous Year-over-Year Decline Occurred in Second Quarter of 2009, Gartner Press Release, May 16, 2012]; [Gartner Says Worldwide Sales of Mobile Phones Declined 2.3 Percent in Second Quarter of 2012, Gartner Press Release, August 14, 2012.] We believe that the number of upcoming high-profile launches from key manufacturers later this year will further steer smartphone growth in the future. We estimate the smartphone penetration in the overall mobile device market to reach up to 50% in the next few years.
With the increasing popularity of both smartphones and tablets devices, these segments are slated to replace PCs as the driving force for the semiconductor industry in the future.
What is Intel’s current market share?
Atom is the brand name of Intel’s ultra-low voltage microprocessors, which was introduced initially to power netbooks, nettops and other mobile internet devices (MIDs). The processors are now increasingly being considered for other devices such as smartphones and tablets. We estimate Intel to currently account for 7% of the total available market, which includes netbooks, smartphones, tablets, car infotainment systems, and smart TVs etc.
Earlier this month, Intel introduced its new processor code-named Clover Trail (Atom Z2670), which will be primarily used in tablets that feature Windows 8 OS. Intel, along with its OEM partners including Asus, Dell, Acer, HP and Samsung, among many other, unveiled their first wave of new tablets and tablets convertible design which will be based on Atom Z2670, Intel Core vPro and Intel Core processors.
We estimate Intel’s revenue from this division to almost triple and the market share to reach around 11% by the end of our forecast period. Apart from the booming growth in smartphones and tablets, we feel that other new Atom based devices such as Google TV, car infotainment systems, home and business energy management systems will improve Intel’s Atom processors share by increasing its available market.
Favorable factors and potential threats for Intel
Intel’s new processors claim to be as energy efficient as the ARM-based processors and offer the same kind of battery life. In addition to Windows 8, tablets running on Intel-architecture have backward compatibility to Windows 7 software and tools, something that you can’t do with Windows RT.
Windows RT is a specifically designed version of Windows 8 OS for ARM devices such as tablets. Controlling close to 90% of the smartphone applications market, ARM Holdings (NASDAQ:ARM) claims not to be threatened by Intel’s entry in this arena. The company feels that ARM-based processors are popular in the market for their superior processing power in smartphones and tablets which will help the company retain its dominance for years to come.
Both ARM and Intel architecture will be Windows 8 compatible and we feel that the backward compatibility of Intel processor with older versions might not suffice as a significant differentiating factor. Even though Intel has made considerable progress in the market so far, we feel it has a long way to go before it can pose as a significant threat to ARM Holdings. An increasing number of product wins for Nvidia’sTegra 3 processors and Qualcomm’s leap to 28nm process technology with the introduction of its Snapdragon processor are thing that Intel needs to wary of.
As per our estimate, the Atom processor division contributes only around 2% to Intel’s valuation. Thus, even if the company manages to double its market share by the end of our forecast period, it will only have a marginal impact on its stock price. Nevertheless, we believe Intel’s foray in the smartphone and tablet market is a good-long term strategy to stay in line with shifting consumer preferences.
Our price estimate 0f $32.88 for Intel marks our valuation at a considerable premium to the current market price.
Disclosure: No positions