Why Intel Needs a Piece of the Mobile Pie

It's been a busy week for Intel (Nasdaq: INTC  ) . The semiconductor maker released first-quarter earnings after the closing bell on Tuesday. Another first for the company comes later this week, with the launch of smartphones running on Intel's new Atom-based Medfield chipset. Let's take a closer look at what it all means, and what's at stake for the tech titan as it enters the mobile space.

A mixed bag
If the market is the ultimate judge, than Intel's quarterly results disappointed. Shares dipped 2% in after-hours trading yesterday because of news that profit fell 13%, on revenue of $12.9 billion. Still, Intel beat the street with earnings per share of $0.53, while analysts had predicted $0.50 per share for the period. The mixed results continued with Intel forecasting an optimistic outlook for the second quarter, although the chip maker also warned that its gross profit margin would slump. 

However, declining margins shouldn't be a complete surprise. Intel is in a transitional period, and capital expenditures are through the roof. To capture future growth opportunities, Intel needs to tap into the mobile industry for growth. That means there's a lot riding on the success of its chips for use in smartphone devices.

A crowded market 
The market for smartphone processors is on track to reach $58.6 billion by 2014 -- growth that Intel can't afford to miss. The company has tried its hand in the mobile-computing segment before, only to lose countless deals to Qualcomm (Nasdaq: QCOM  ) and other chip developers licensing technology from ARM Holdings (Nasdaq: ARMH  ) . Qualcomm is the current leader in terms of smartphone and tablet market share, with chipsets that it builds based on ARM's technology.

The chips used inApple's (Nasdaq: AAPL  ) devices also run on the ARM platform. That's because Intel's processors consume significantly more battery power than ARM-based chips -- a reality that Intel's new mobile strategy plans to change. At the Consumer Electronics Show in January, Intel announced multi-device agreements with cell-phone makers Motorola Mobility (NYSE: MMI  ) and Lenovo to roll out smartphones powered by Intel chips.

Early tests showed that Intel's new Medfield Atom chips were able to match the performance and battery life of rival ARM's processors. Now that Intel finally has a foot in the mobile market, it faces the bigger challenge of getting major players like Apple to adopt its chips. Intel's processors are already used in Apple's laptop and desktop computers, so it would be a natural fit. However, it's not going to happen overnight.

How to play it
These ongoing product and platform upgrades are crucial for Intel as it tries to stay relevant in a post-PC world. But, a massive transition like this doesn't come without a cost. In this case, the company plans to dish out more than $12 billion in capital expenditures this year, which is up from just $5 billion in 2010. This doesn't change the fact that Intel is a good company, and over the long term I think it will emerge stronger because of its entry into growth markets like mobile.

However, I don't like Intel as an investment right now. While we won't know for sure until the new Intel-powered phones launch later this week, it could be a serious growth driver for the company down the road. For now, I encourage you to add the stock to My Watchlist -- The Motley Fool's free tool that lets you track and monitor your favorite stocks.

Fool contributor Tamara Rutter owns shares of Apple. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Qualcomm, Intel, and Apple. Motley Fool newsletter services have recommended buying shares of Intel and Apple and  creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2012, at 7:32 PM, YoungDude20 wrote:

    Been buying INTC every time its PE < 10 (BARGAIN). Been working for me so far!

  • Report this Comment On April 19, 2012, at 5:03 AM, H3D wrote:

    "... Qualcomm is the current leader in terms of smartphone and tablet market share, with chipsets that it builds based on ARM's technology."

    More that half of tablets sold are Apple using Apple's own ARM chips fabricated by Samsung.

    So how cam Qualcomm be the market leader on tablets.

  • Report this Comment On April 19, 2012, at 5:17 AM, H3D wrote:

    If Intel can match the best ARM implementations on power consumption, then they stand a good chance on Windows mobile devices. But The best ARM implementations aren't standing still either.

    However if Intel catch up simply by hardware technology advantage, rather than by architectural improvements, then this will not platforms on board.

    They will look ahead and see that those advantages will propagate, reversing the change, and leaving them stranded on the wrong instruction set.

    Intel would do far better to make and sell its own ARM based processors. But pride will not allow this.

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