Chip manufacturer Intel (NASDAQ: INTC ) seems to be a company most investors shy away from, and it's easy to guess why. Intel continues to derive more than 80% of its overall revenue from the sale of chips made for personal computers, an industry considered by many to be in the midst of a sunset. With research firm IDC predicting a continued fall in PC shipments through 2014, the situation is not getting better anytime soon.
To add to its problems, Intel has failed to gain a proper foothold in the area of manufacturing chips for the growing smartphone industry, as evidenced by its embarrassing less-than-1% market share. It was probably this combination of factors that prompted management to declare that the company's 2014 revenue guidance would remain largely unchanged from that of the current year. Naturally, the Street felt jittery and the stock price nosedived by a significant 5.4%.
Having followed Intel for a while, the news was hardly a surprise, given the company's failure to carve out a solid, alternate revenue stream for quite some time now. While this is a stock that often tests your patience, there are a few things worth considering in the long run.
A more open approach
Intel's recent decision to open up its chip manufacturing foundries to fellow manufacturers reiterates faith in the new and more open approach followed by the company's newly appointed CEO, Brian Krzanich. It's about time that Intel took advantage of its superior production capabilities over industry rival and contract chip manufacturer, Taiwan Semiconductor Manufacturing Company, or TSMC (NYSE: TSM ) and boost revenue generation in the process.
Given that Intel's cutting-edge 14-nanometer chip production capacity is as yet unrivaled in the industry, this welcome change in the company's chip-making policy has huge potential. It puts Intel in a technologically superior position to cater to a wide range of customers, including leading mobile chip specialist Qualcomm (NASDAQ: QCOM ) and graphics chip expert NVIDIA, two of the many companies that currently outsource their chip manufacturing processes to TSMC.
Intel has expressed willingness to make chips for companies that license design technology from industry peer ARM Holdings. While this may look like a classic "if you can't beat 'em, join 'em" scenario, smart investors must keep in mind that if Intel manages to convert a fraction of ARM's army of licensees and manufacture chips on their behalf, that could drastically alter its present fortunes.
With PC shipments declining at a steady pace, Intel badly needs to win more orders to prevent any possible under-utilization of its vast chip production facilities. However, its biggest challenge will be to woo customers from TSMC, the planet's largest contract chip maker with around 50% of global market share. Apart from the fact that this involves implementing a very competitive price policy, Intel's sales team also faces the Herculean task of changing the popular customer mind-set wherein the company is primarily perceived as a PC chip manufacturer.
Another big issue that Intel will have to deal with centers on the manufacture of chips that run on the next-generation 4G LTE technology standard. This is an area where the company is generations behind Qualcomm, a major TSMC customer and industry rival. Manufacture of LTE-enabled chips is a primary area of strength for Qualcomm, one that has helped it secure a whopping 97% share of global LTE-based revenue.
More good things
On the bright side, Intel announced plans to manufacture SoFIA, a low-end version of its Atom line of mobile processors. SoFIA seems to be part of a smart move by Intel and is expected to be effective in countering Qualcomm's current strategy of manufacturing less expensive chips for mid-range smartphones that are in high demand in emerging markets such as China. That apart, one also needs to make special mention of Intel's plans for Quark, a new low-power microchip designed for wearable devices, tipped to be the next big technological advancement.
Foolish final thoughts
Intel's decision to open its chip production facilities to fellow manufacturers should lead to major benefits for the company, but a lot depends on how well the concept is marketed and executed. With the company declaring its intention to focus on major smartphone suppliers, an eventual deal with Apple to manufacture chips for the latter's iPhones and iPads is also something that cannot be entirely ruled out. In fact, Intel's superior chip manufacturing capability can certainly help the company gain from Apple's long-standing love-hate relationship with Samsung, its current chip supplier.
In the end, I cannot help but admit that there are a few possible bright spots on Intel's long-term horizon. Also, don't forget that this is a company with the financial muscle and technological capacity to secure big wins in the chip manufacturing arena. Investors would do well to hold on to Intel for now, keeping a very close watch on future developments.
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