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Russ Fischer
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I have retired from a 35 years career in the semiconductor industry. I now have the time to do the deep research necessary for successful investing. I freely provide investment information for friends and family. I am a member of MENSA, which means precisely nothing except I wake up in the... More
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  • Intel: Debunking A Myth

    The Myth: Intel (INTC) can't compete in the low margin mobile SoC business.

    We will use data from Yahoo Finance and some forth grade arithmetic to demonstrate how silly this is.

    While we can't know the exact gross margins a any particular device, a company's overall gross margin will serve as a close approximation for the individual device margins.

    Let's use a mobile chip that sells for $10 to make the arithmetic easy. for the first supplier we will use Qualcomm (QCOM). QCOM has corporate gross margins of 67%. since a good size chunk of QCOM's business is cost-free revenue from patent royalties, we will reduce this 67% to 60%. Fair? Ok, QCOM will pay their wafer supplier, TSMC (TSM) 40% of the $10 or $4 for that chip. TSMC, in turn, has corporate gross margins of 45%, so that chip that they charge QCOM $4 for has a manufacturing cost of $2.20. That $10 chip has a total gross margin from manufacturing to the end user circuit board of 78%!

    Let's compare that to the same size device supplied by Intel. Since Intel is thought to be a higher cost manufacturer (I don't think this is true, but we'll throw the Myth Believers a bone), we will use an Intel manufacturing cost of $3. Intel likes to get 65% gross margins, so if we divide by .35 we will get the Intel full margin price to the end customer of $3/.35 = $8.57.

    Now, let's assume that Intel is not the high cost producer and that their cost is also $2.20. In this case a full 65% margin final price from Intel for that $10 part would be $6.28!

    Of course, the best technology available to QCOM would be the TSMC 28/32nm node.

    Let's assume that the Intel version of our fictitious chip is built on their 22nm process. That would make the chip 40% smaller that the 28nm chip. It would also be 40% cheaper, so that would give us an Intel cost of $1.32. Plugging the 65% gross margin onto this cost would give an end customer a price of 3.77.

    Just to bore you further, consider this chip built on Intel's 14nm process. The cost drops to $.55, the end price drops to $1.57.

    This is how we get to a $100 smartphone cost and a $200 retail price to you and me.

    So, the myth is not only false, but the cost and competitive advantage that Intel has over the competition is so overwhelming and smothering that for suppliers like Qualcomm and Nvidia (NVDA), even selling at cost doesn't do any good! Oh, and the mobile SoC in not a low margin business.

    Does this give us an idea why Apple (AAPL) has decided to design their own SoC and deal directly with the semiconductor manufacturer?

    Texas Instruments (TXN) has figured all this out early and decided to exit the mobile SoC business.

    Disclosure: I am long INTC. 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.

    Sep 28 2:34 PM | Link | 5 Comments
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