2012: The Year Intel Stalled

This year has served as a painful reminder for Intel (NASDAQ: INTC  ) of what a precarious position its business is in. Intel has not navigated the shift to mobile very well, and that major strategic oversight is now coming to a head. After putting up healthy revenue growth over the past three years, Intel will not be enjoying any top-line gains in 2012.

Metric

2009

2010

2011

2012 YTD

Net revenue

$35.1 billion

$43.6 billion

$54.0 billion

$39.9 billion

Source: SEC filings.

Through the first three fiscal quarters of 2012, Intel has generated $39.9 billion in sales, meaning it would have to top $14.1 billion in sales in the fourth quarter to avoid revenue declines for the full year. For context, Intel's quarterly sales have only reached that high once: Q3 2011 with record $14.3 billion. With the PC market in decline and a lukewarm launch of Microsoft (NASDAQ: MSFT  ) Windows 8, I don't think Chipzilla will be putting up record quarters any time soon.

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That's why shares have lost 15% this year.

Tick tock
Following its famous tick-tock model, 2012 was a tick year, in which the company advanced its manufacturing down to the 22-nanometer node code-named Ivy Bridge. That keeps the company ahead of most of its fabless rivals, which were primarily making 28-nanometer chips this year.

The real performance improvement in this year's Ivy Bridge chips was in the integrated GPU, while CPU gains were more modest. Graphics performance saw enough of a jump that Intel even dubbed 2012 a "tick+" year. Next year's Haswell microarchitecture promises even more improvements on the graphics front and will continue on the 22-nanometer process.

Atom bomb
At CES in January, Intel touted its Atom chips that were destined to make their way into smartphones throughout the year. The company said it was already working with major vendors like Motorola and Lenovo, after partnering up with Google (NASDAQ: GOOGL  ) late last year to optimize Android for its x86 chips. A few months later, Google would close its acquisition of Motorola.

Indian smartphone vendor Lava would launch the world's first Android phone with Intel inside in April, the Xolo X900. Motorola recently launched its RAZR i, a variant of its RAZR M that instead carries an Intel Atom chip as opposed to a Qualcomm (NASDAQ: QCOM  ) Snapdragon.

Through the first half of the year, Intel had yet to make any meaningful progress on the smartphone front. Strategy Analytics estimated its unit share of the smartphone market at just 0.2% for that time frame. The Atom family is reported within Intel's other architecture segment (9% of sales last quarter), which still pales in comparison to the core PC segment (69% of sales last quarter).

Tablet talk
Intel's main tablet foray comes in the form of Windows 8, as OEMs scramble to manufacture just about every form factor they can imagine. That includes laptops, tablets, and everything in between. Intel's Clover Trail Atom chips are featured in Windows 8 tablets, and it's planning on bringing those to Android tablets in the near future, as well.

Microsoft's upcoming Surface 8 Pro will also feature an Intel chip and will be one of the software giant's two flagship Surface tablets. The Surface RT that was launched a few months back carries an NVIDIA (NASDAQ: NVDA  ) Tegra chip instead, but also starts at a lower price point.

Fresh blood
Last month, CEO Paul Otellini surprised the board by announcing his intention to retire next May. Otellini has been Intel's fifth CEO and spent almost 40 years with the company (eight of which as CEO). While Otellini led the company through tremendous growth, he is also largely responsible for overlooking the opportunities in mobile computing.

The board is now looking both internally and externally for successor candidates, but more than likely the new CEO will come from within the company. Intel has never hired a CEO externally, in part because it would take years just to understand Intel's inner workings.

Passing the crown
As further evidence of the shift from traditional computing to mobile computing, Qualcomm overtook Intel by market cap this year. Both chip giants are valued just over $100 billion, but Qualcomm's better growth prospects have allowed it to now become the largest semiconductor company in the world, even though Intel garners more semiconductor revenue in dollar terms.

Intel, Samsung, and Qualcomm now account for over 30% of worldwide semiconductor sales as the top three vendors (in that order).

Stalling
This year has shown that having the most powerful chips may not be enough to drive growth in the years ahead for Intel. At a certain point, performance oversupply sets in and the basis of competition shifts. The shift to mobile will benefit the data center business, but gains there alone can't offset the weakness in the PC market.

After Intel puts up no revenue growth this year, will things get better in 2013?

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand about the chip giant. Better yet, you'll continue to receive updates for an entire year. Click here now to learn more.


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