For Intel’s Mobile Strategy, This Is the Game Changer

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Even as an ardent Intel (NASDAQ: INTC  ) bull, it is not difficult to understand why some investors may be running out of patience with the company's mobile strategy. Each year, Intel's product offerings become faster and more feature-rich. But it also seems that each year, the company closes the gap but doesn't quite get there. In mid-2015, the company rolls out its next-generation system-on-chip called Broxton, and this chip will be the one that finally changes the game for Intel.

Why has Intel failed so far?
The ironic thing about mobile system-on-chip products is that despite their low cost, these little chips integrate a ton of IP. It's not good enough to just get one or two blocks right -- a successful system-on-chip vendor integrates all of the right IP and gets that solution to market as quickly as possible. Intel's problem is that when it first began its system-on-chip efforts back in 2008, it was missing a lot of critical IP. Five years and many acquisitions later, Intel now has the IP mostly right, and the company's recently launched Bay Trail system-on-chip is proof of that.

However, having the right IP in place isn't enough. While the company's Bay Trail chip is an excellent solution for tablets from a performance and power perspective, it's not as highly integrated as chips from its competitors and, unfortunately, the platform itself sports a rather rich bill of materials. While Intel is helping its OEM partners out with subsidies, which should help it reach its aggressive goals of "more than 40 million" tablets for next year, this doesn't solve the smartphone problem.

Smartphones are just plain tough
At Intel's analyst day, the company partitioned the smartphone market into five different buckets, as illustrated here

The vast majority of the smartphone market -- more than 50% -- falls into the "ultra-low cost," "entry," and "value" buckets, which means rather inexpensive phones. The rest of the market, performance and mainstream, is still a sizable chunk -- and the silicon ASPs in higher-end devices is naturally higher. But this market is also not growing as quickly.

The performance and mainstream markets are the markets in which Intel can -- and should -- differentiate based on performance. But the irony here is that the company's chips have repeatedly missed the mark time and again compared to competitive chipsets from Qualcomm (NASDAQ: QCOM  ) . They're getting better, but they're still not there yet.

In the mainstream segment, the market is absolutely brutal. Margins are cutthroat and there is a distinct focus on entire platforms and highly integrated solutions. Intel is well behind competitors like Qualcomm, Broadcom, MediaTek, and Marvell here. But the company hopes that its newly announced SoFIA parts for this space will finally help it be competitive -- although the first iteration will include a 3G modem, making it uncompetitive with the LTE-capable parts coming to market soon.

Broxton: It's the game changer
At the risk of sounding naive, it's clear that the company's upcoming Broxton chip will finally be the part that gets Intel some real design wins in the high end of the market. The company pointed out at its analyst day meeting that this part would drive leadership performance and would be suitable for the highest-end smartphones. One Intel engineer that I spoke with flatly indicated that if Broxton didn't dominate the competition that he would retire. Bold words, indeed!

While the competition certainly isn't asleep -- again, Qualcomm is very good at its job -- Intel will have a fundamental density and transistor performance advantage with its 14-nanometer processors. Intel will also need to nail the design. But if the company delivers what it has promised at its analyst day, Intel's competitors will run into economic and physics-related barriers that should allow the company to have a meaningful lead in performance per watt and integration of compelling IP at the high end.

Foolish bottom line
If Intel can deliver on Broxton, then it will have proven its abilities to really play in the high end of the market. The lower end of the market will still probably remain elusive until its highly integrated part gets moved to the company's 14-nanometer process,  which will bring cost, performance, and power advantages. But this isn't as important as gaining traction in the higher-margin, high end of the market.

Investors with a long time horizon could be rewarded handsomely if Intel finally comes through, and with a roughly 3.7% dividend yield and a modest valuation -- roughly 13 times forward earnings -- the risk here really seems to be opportunity cost rather than permanent capital impairment.

More compelling ideas from the Motley Fool
They said it couldn’t be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he’s ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen 6 picks for ultimate growth instantly, because he’s making this premium report free for you today. Click here now for access.

Read/Post Comments (0) | 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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

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: 2760389, ~/Articles/ArticleHandler.aspx, 10/1/2016 11:33:46 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...

Today's Market

updated 14 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:00 PM
INTC $37.75 Up +0.43 +1.15%
Intel CAPS Rating: ****
QCOM $68.50 Up +1.05 +1.56%
Qualcomm CAPS Rating: ****