Unit Rich, Cash Poor: Intel Atom's Chip on Its Shoulder

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If Intel (NASDAQ: INTC  ) had its way, it would power all of the planet's computing devices. Unfortunately, the world has moved quicker than Intel would've liked, and now the company is playing catch-up in the age of mobile computing. To that end, Intel's fashionably late entry into mobile computing will be based on future Intel Atom releases covering a gamut of smartphones and tablets.

With combined worldwide tablet and smartphone shipments easily surpassing over a billion units annually, Intel's Atom's addressable market could be poised to grow larger than the 320 million or so PCs that ship each year. Should Intel manage to substantially grow its mobile computing market share, Intel Atom will become an increasingly important business.

Greater priority
In the past, Intel's leading-edge capacity was allocated to its Core line of PC processors and Atom was given a lower upgrade priority. If recently appointed CEO Brian Krzanich has any say in the matter, that's likely to change in the future. He was recently quoted saying how "we see that Atom is now at the same importance [as its Core processor line], it's launching on the same leading-edge technology, sometimes even before the Core [family of processors]." Ultimately, Krzanich made it clear that Atom will be given a greater priority going forward.

Just how important?
Despite mobile computing having a much larger addressable market in terms of total units, the potential revenue per unit is far less than a PC. To give you an idea of what Intel might earn, mobile computing giant Qualcomm (NASDAQ: QCOM  ) shipped 173 million chips last quarter, generating about $3.9 billion in revenue, which implies an average selling price of around $22. With Intel's ASP believed to be around $107, it's almost a given that its ASP will decline if Intel wants to be competitive in mobile computing. At those prices, even if Intel sold every mobile computing processor expected to ship this year, it wouldn't match the annual revenue it generates from PCs.

Hypothetically, if Intel could fetch the same $22 Qualcomm commands and it could power all of the roughly 1.15 billion smartphones and tablets expected to ship this year, it would translate to $25.3 billion in revenue, $9 billion less than what Intel's PC client group brought in last year. For mobile to surpass its PC client group revenue, Intel would need to command an ASP of $30, a 36% premium over Qualcomm's ASP.

Of course, it isn't realistic for Intel to find its way into every single mobile computing device being shipped when you have companies like Apple and Samsung designing in-house processors that command a hefty piece of the market. It's more realistic to think that Qualcomm's annual chip shipments are along the lines of Intel's maximum potential in mobile. Considering Qualcomm shipped 590 million chips last year, we're only talking about roughly $13 billion in revenue at $22 per chip. To put this figure in perspective, it represents 24% of Intel's 2013 projected revenue.

Additionally, the rise of mobile computing has been cannibalizing PC shipments since 2011, which has put added pressure on Intel's revenue. Between these factors, it's all but certain that Intel will face revenue headwinds in the future.

The great unknown
As Intel works to find its footing in mobile computing while its existing PC business is cannibalized, I'm not expecting the transition to go smoothly. There's no way to know for sure if Intel can maintain its historically rich profit margins as it faces revenue headwinds.

That said, there's still a war going on between the five biggest titans of technology. In The Motley Fool's latest free report, you'll get the details to help you determine if your portfolio is on the right side of the investment. Click here to make sure you're in position to capitalize.

Read/Post Comments (5) | Recommend This Article (1)

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.

  • Report this Comment On July 10, 2013, at 7:48 PM, fearandgreed2005 wrote:

    At 14nm things shrink by 4x as compared to the competition which is at 28nm. Did you ever consider that Intel could integrate a lot more functionality into their chip and claim the revenue that is now being spent on other chips?

  • Report this Comment On July 10, 2013, at 8:10 PM, Mike655mm wrote:

    2 problems with this article which shows a lack of understanding in this segment. 1) Intel is not cash poor as the subject states. As of Dec. 31, 2012, Intel had over $18B in cash and short-term investments -- not Apple numbers, but still pretty impressive. 2) The article only talks about ASPs, not Margins.

    Wafer costs are fixed. What drives unit costs and ASPs is die size. Server chips have bigger die sizes which result in bigger ASPs. Since you can fit many more smaller die like Atom on the same size wafer, die costs are much smaller and ASPs can be much smaller to achieve the same margins and profit PER WAFER.

    Since Intel is at least one process node ahead of their competition, which translates to smaller die sizes, Intel has even more of an advantage.

    If Intel is able to deliver a higher performing Atom chip on 14nm with the same die size as ARM on 32nm or 22nm, wouldn't ARM vendors be just a little concerned ?

  • Report this Comment On July 11, 2013, at 12:45 AM, Netteligent09 wrote:

    Intel is too big to make any move and too slow to lead the market.

    The embedded market is about to change at the end of 2013. As market and technology are mature, customers demand a low price products without sacrifice quality. Intel needs a breakthrough system integration and innovative chipset solution beyond core processors. So far there is none.

    ARM Holdings and its partners are going to launch a major products this Christmas. It took ARM more than ten years to prepare for a worldwide showdown, Intel must work with entrepreneurial spirits, 10 times harder and smarter within the next 10 years to get its market under control.

    Like Olympic, die size and wafer are a must but Intel needs to move with agile and more real breakthroughs.

  • Report this Comment On July 11, 2013, at 8:38 AM, Cos271 wrote:

    Intel's problem is fairly straightforward. In the PC space they generate cash as a virtual monopoly and can dial their profit to any setting. They have been running the company as if those margins will continue to exist. Unless they can control a virtual monopoly in the mobile world, they won't be able to set the price and as the OP pointed out, this is full of problems.

    The smartphone market is saturating. Most people are satisfied with their phones and probably want to avoid the headache of upgrading. If Intel had this technological advantage 5 years ago, we might have a different story. Now it may only get them onto the playing field.

  • Report this Comment On July 11, 2013, at 12:00 PM, jimbeama wrote:

    Mobile computing is not simply the smartphone. It is also the light weight tablet ala iPad. It is also the PC like tablets such as the surface which contain Intel core processors just like a traditional laptop. So some of the cannibalization of the PC market is actually just a form factor change. The ASP stated is I believe the average for all processors Intel ships. So $2000+ Xeons are being lumped into the mix with atoms sold into phones and tablets.

    Does the mobile division need to surpass the PC client division for Intel to be successful?

    finally this argument has been discussed at least for 1-2 years already. Nothing original here.

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