How Massive Is Intel's Smartphone Opportunity?

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By now, you should be well aware that Intel (NASDAQ: INTC  ) is planning on making a big splash in the smartphone world. Given the explosive rise of smartphones and tablets, it's not surprising to see Intel shift its focus toward a mobile-centric future. However, it's been difficult for investors to gauge how much money Intel could potentially make in smartphones, and whether the company has to make any sacrifices in doing so.

An almost-perfect proxy
Last year, over 712 million smartphones were put into the hands of users across the globe. Of that 712 million, Apple accounted for nearly 136 million devices and Samsung accounted for roughly 206 million. Considering that both companies have a history of designing custom processors based on ARM Holdings' designs, it stands to reason that Intel wouldn't have an opportunity to win this business. That leaves about 356 million smartphones left to be Intel-powered -- the other half of the addressable market.

To better gauge this opportunity, Qualcomm (NASDAQ: QCOM  ) gives us insight into what this could actually mean for Intel investors. Last year, Qualcomm shipped 616 million chips from its semiconductor division, allowing it to earn about $13.2 billion in revenue. These results imply an average selling price per chip of $21.39.

This might sting
No matter how you cut it, Intel is going to have to deal with lower average selling prices if it wants to be competitive in mobile computing. It's believed that Intel's average price per chip breaks down to about $107 -- far above the $21.39 that Qualcomm commands. Granted, Intel's trailing-12-month gross profit margin is over three times richer than what Qualcomm earns on its chip business. More than likely, Intel's gross profit margin will likely be cannibalized at the expense of growth in mobile computing, unless Intel can somehow maintain its historically rich profitability. After all, the company had record gross profits during the 2009-2010 Intel Atom heydays, which remains central to Intel's smartphone strategy.

Helping ease profitability concerns is Intel's CEO Paul Otellini, who said during the company's most recent conference call that its leading-edge capacity bears the lowest cost on a per-unit basis, offers the highest performance, and draws the lowest power. Ultimately, Intel's mobile chip solutions will be based on leading-edge capacity, indicating that perhaps Intel can maintain a high profitability throughout its mobile transformation.

Chew on this
As a result of the smartphone and tablet revolution, PC sales are expected to see their second year of consecutive decline. This year, about 2.7 smartphones are expected to ship for every one PC. Assuming Intel cannot charge a premium relative to Qualcomm, it must ship five smartphones in order to replace the revenue from one PC sale. Then again, perhaps Intel's x86-architecture gives it pricing power over the competition, since it theoretically offers the capacity to run the full version of Windows 8 on a smartphone. Additionally, Intel's upcoming 22-nanometer smartphone offerings will be a full generation ahead of the ARM completion.

Regardless of pricing, I think it's more important for investors to focus on Intel's gross profit margin, which directly feeds into its bottom line. Unfortunately at this time, this aspect remains a bit of a wild card.

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. Click here now to learn more.

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9/28/2016 4:00 PM
INTC $37.44 Up +0.26 +0.70%
Intel CAPS Rating: ****
QCOM $63.45 Up +0.14 +0.22%
Qualcomm CAPS Rating: ****
AAPL $113.95 Up +0.86 +0.76%
Apple CAPS Rating: ****
ARMH $0.00 Down +0.00 +0.00%
ARM Holdings CAPS Rating: ***