Will Intel See Another Symbolic Loss in 2013?

With how the application processor value chain is evolving right now, Intel (NASDAQ: INTC  ) , faces incredible uncertainty heading into the mobile revolution. Once upon a time, it had a stranglehold supplying chips to computing devices, but that's loosening now that consumers increasingly connect via smartphones and tablets with no Intel inside.

Three in one
Whereas Intel's focus has always been vertical integration of architecture, design, and manufacturing, the mobile value chain is segmenting those roles, and the inherent competition within each layer is undermining the pricing power that Intel has enjoyed for decades.

At the end of last year, mobile chip giant Qualcomm (NASDAQ: QCOM  ) enjoyed a symbolic victory over Intel as its market cap overtook Intel's for the first time ever, earning it the title of the largest semiconductor company in the world by market cap. (Intel is still top dog in terms of sheer revenue.) As the market leader in both mobile applications processors and baseband modems, the event was a milestone that aptly embodies the broader shift to mobile platforms.

Will Intel see another symbolic loss in valuation in 2013? Chip manufacturer Taiwan Semiconductor (NYSE: TSM  ) isn't far behind now.

INTC Market Cap Chart

INTC Market Cap data by YCharts.

At the rate that the two are going, it's very conceivable that Taiwan Semiconductor's valuation could top Intel's by year's end, as the former is the dominant chip manufacturer. If you look at each company's recent growth figures for both top and bottom lines, it's obvious why each player's market cap trajectories are heading up or down.

Company

Sales Growth (MRQ)

Sales Growth (TTM)

EPS Growth (MRQ)

EPS Growth (TTM)

Intel

(5.5%)

4.2%

(11.2%)

(1.1%)

Qualcomm

18.3%

27.8%

15.6%

13.1%

Taiwan Semiconductor

32.8%

10.9%

62.2%

8.9%

Source: Reuters. TTM = trailing 12 months. MRQ = most recent quarter.

Intel's figures have struggled in the face of stagnant PC sales, of which it remains heavily reliant on, for better or for worse. Lately, that's been worse as consumer spending shifts.

Who needs the PC
Growth in the data center driven by the cloud can only go so far, and can't even come close to making up losses in the PC division, especially if they get worse. Here's how each segment pitched in to sales last quarter.

Segment

Net Revenue (MRQ)

Percentage of Total Revenue (MRQ)

Growth (YOY)

PC client group

$8.6 billion

64.2%

(8.3%)

Data center group

$2.7 billion

19.7%

5.7%

Source: Intel 10-Q. MRQ = most recent quarter.

Looking at operating income for each segment paints an even clearer picture: Intel's business is still all about the PC.

Segment

Operating Income (MRQ)

Percentage of Total Operating Income (MRQ)

Growth (YOY)

PC client group

$3.3 billion

86.8%

(16.8%)

Data center group

$1.2 billion

31.5%

(0.7%)

Source: Intel 10-Q. MRQ = most recent quarter. Percentages sum to greater than 100% due to operating losses in other segments not shown.

It's no surprise that Intel is considering expanding its small foundry business, although it has said specifically that it's not looking to compete directly with Taiwan Semiconductor. But putting that excess capacity to use in the face of declining PC chip shipments is better than idling those expensive factories.

The weakest link
Qualcomm easily represents the leader in competing chip design, Taiwan Semiconductor is top dog in manufacturing, and ARM Holdings (NASDAQ: ARMH  ) provides the architecture piece of the puzzle. ARM's market cap remains well below Intel's at $18 billion, so it's highly unlikely that ARM could overtake Intel in valuation any time soon. Besides, ARM's own role in the value chain is less profitable than those in design and manufacture.

By the end of 2013, don't be surprised if Taiwan Semiconductor joins Qualcomm in looking down on Intel's market cap.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2483698, ~/Articles/ArticleHandler.aspx, 10/20/2014 4:42:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement