Intel: The Real 'Problem' With Bay Trail

| About: Intel Corporation (INTC)

Michael Blair offered an interesting rebuttal to my piece, "Apple Outguns Intel", offering the following claim right up front:

Their criticisms of Intel generally and Bay Trail in particular seem to be that Intel's tablet processors are not competitive on performance with Apple's (NASDAQ:AAPL) A7; that few OEMs have adopted them; and, that devices that do use Intel Bay Trail processors are not selling well. Let's deal with each.

Unfortunately, while I do appreciate Mr. Blair's perspective, I think that he isn't quite grasping what many frustrated Intel (NASDAQ:INTC) bulls (and Intel bears) have been "complaining" about. It's not that Intel's tablet processors aren't competitive on performance with Apple's A7, Qualcomm's (NASDAQ:QCOM) Snapdragon 800, or NVIDIA's (NASDAQ:NVDA) Tegra 4. Indeed, Intel has leadership CPU performance and competitive (but not quite leadership) graphics performance with Bay Trail. The article Mr. Blair is refuting was talking about Merrifield - a smartphone oriented processor. Apples to oranges!

No, the problems with Bay Trail-T - that is, the instantiation of Bay Trail for tablets - are the following:

  • Contra-Revenue: As disclosed at Intel's Investor Meeting in November, 2013, these chips carry with them a very high platform bill-of-materials, and as a result are more expensive for the system integrators to use relative to their competition. This has forced Intel to provide rebates until Intel can bring down the platform bill-of-materials in both the Bay Trail-T platform as well as future Intel platforms (Broxton and SoFIA eliminate this problem). Intel will not recognize much, if any, net revenue from the sale of each Bay Trail-T.
  • No Android: Intel had promised Bay Trail-T powered Android devices during the "Holiday 2013" selling season on numerous occasions, only to backtrack and claim that such devices were coming in Q2 2014. If anybody's interested, I'd be happy to provide evidence from various events/conference calls that illustrates this on my Instablog if there is enough interest.

Indeed, while the first one isn't really of much concern to me (since I know Intel is fighting to win sockets today that will be populated with profitable chips tomorrow), the second one is a pretty major problem. Android is the most popular tablet OS today, and it is poised to continue growth - especially in the low end of the market - for many years to come, as illustrated by this slide from Intel's own IDF presentation:

The Windows opportunity, while important in order to keep ARM from pushing upwards in the consumer computing market, is relatively small in comparison (although it is fast growing):

A Silver Lining

That being said, Intel did assure investors that it had "over 87" design wins that it "anticipates" for the year at its Mobile World Congress showing. I'd assume that most of these are no-name, low-end devices that probably won't sell all that many individually, but there is the hope that at least a couple of these "87+" designs are meaningful and fairly high volume. The remaining "no-name" ones could also add up to a meaningful number. The hope is certainly not lost, but investors entrusting their capital in Intel stock really need to keep track of these things and to not be afraid to ask questions.

Bottom Line

I remain long Intel, but it is not my duty to only point out the positives. And, when a stock/company is such a multi-year, serial under-performer, the focus necessarily needs to be on what said company is doing wrong so that investors can recognize the progress in remedying these problems, ultimately leading to a higher share price.

Disclosure: I am long INTC, NVDA. 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.

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