Why Intel Won’t Quit Mobile

When a company like Amazon chooses to invest heavily on the promise of future growth and profitability, Wall Street tends to rightfully cheer these forward-thinking growth initiatives. However, when a company like Intel (NASDAQ: INTC  ) begins such an investment cycle in difficult businesses from a technical perspective, investors see the red ink and want the company to bail on the efforts. Fortunately for long-term Intel investors, bailing is almost certainly not the path that Intel's management will choose.

Does this look like a company that will quit mobile?
At Intel's investor meeting, it gave the following chart to illustrate just how the company was shifting its investments in 2014 relative to 2012:

Source: Intel

Notice that Intel is increasing its investments in tablets by more than 75% over 2012, and its investments in cellular modems -- and likely connectivity IP -- by more than 15%. Notice, too, that while the company is "decreasing" its investments in phones, there are really two major components to that:

  • The company is merging tablet and phone chips, so they won't be separate from an investment allocation standpoint.
  • In the past, Intel had focused on building elaborate reference designs, qualifying them on carriers, and selling these designs through the carriers. In 2014 and beyond, the focus will be on selling solutions targeted at the market leaders, i.e., Samsung, Lenovo, LG, et al.

So, Intel is still very much focused on smartphone chips, particularly as these will be interchangeable with tablet chips. The investment profile shown here is not consistent with the rumor that DigiTimes had heard from its sources about Intel "quitting" the smartphone business altogether.

Why do some want Intel to quit mobile?
Look at Qualcomm (NASDAQ: QCOM  ) , which is the leader in mobile chips by a wide margin. In its most recent fiscal year, the company sold $16.7 billion worth of mobile chips and generated $3.2 billion in pre-tax income. Intel, on the other hand, saw $4.1 billion in net revenue in its "Other Intel Architecture," and about half of it was from mobile, e.g., cellular basebands/transceivers, tablet chips, limited number of smartphone apps processors. It had an operating loss of $2.44 billion. What's interesting is that the Intelligent Systems group within Other Intel Architecture made a bit more than $2 billion in revenue and saw operating margin in the neighborhood of $1 billion in 2013.

Source: Intel

This would imply that the remaining portion of Other IA, i.e. mobile, generated revenue of about $2 billion and saw an operating loss in the neighborhood of $3.44 billion. Assuming gross margins of 40% for the non-Intelligent Systems portion of this division, this implies operating expenses north of $4 billion.

Obviously Intel has two ways to shrink this loss:

  • Drive revenue growth in Other IA
  • Quit

Just about all of what Intel develops for its smartphone chips -- low-power cores, SoC methodology, GPUs, connectivity, cellular, etc. -- can and will be applicable to PCs and tablets. So, the losses really wouldn't go away without compromising Intel's future in its core markets, which will need all of this IP down the line. Quitting mobile might embed these losses elsewhere, and perhaps they would be narrowed to some degree, but Intel wouldn't save nearly as much money as one might initially expect.

Intel's only way out is through
Intel is, at its heart, a computing company. Management would be remiss to not fight tooth and nail to gain a meaningful position in smartphones and tablets -- two of the fastest-growing segments of computing where the need for more performance plays right into Intel's core competencies. Intel and its investors need to accept that the company needs to make this broad investment to really win longer-term.

Note that Intel is spending about $4 billion on mobile chips, so it stands to reason that as this pipeline of products matures, the products that actually come out of Intel should actually be quite compelling. However, these investments take time. Long-term, Intel is likely to emerge as a leader in smartphone and tablet processors, but. But for now, it is still really in the investment phase.

Foolish take
This is a reality that Intel investors need to accept. In due time, patience may pay fairly hefty dividends. Until then, investors seeking more immediate gratification or success in the mobile space would be better off picking up shares of Qualcomm on a dip. It is likely to continue to be the leader here for many years to come -- although share loss is a real risk on the chip side of Qualcomm's business longer-term. 

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Read/Post Comments (9) | 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 February 01, 2014, at 10:54 PM, bluesky64 wrote:

    Ashraf,

    One day your leaning one way the next the other way. I just can't seem to follow your hot and cold a like or hate INTC. This is followed up with your 24hr posting hate comment on chat boards about other companies and posters not very professional or objective. Thumbs down sorry.

  • Report this Comment On February 02, 2014, at 12:48 AM, techy46 wrote:

    Nice recap of Intel's pending mobile strategy. Intel's lost some time in protecting their PC client and server chip ASP and GM over the last 3-5 years and is now focused on making up the gap and adding the LTE IP. Intel ahs nowhere to go in mobile but up but they'll have to make up some revenue in IoT as mobile PC's eat into classic chip sales.

  • Report this Comment On February 02, 2014, at 10:33 AM, keeperoftheq wrote:

    The tablet processor market is expected to grow 23 percent in 2014 and Intel is poised to make a run courtesy of its Bay Trail chips, according to IHS Technology. The problem: Intel will have to battle Samsung and Qualcomm as well as a bevy of Chinese commodity chip makers.

    But it's the low end of the tablet market that's worrisome, according to IHS. Rockchip, Allwinner and Amlogic---three Chinese chipmakers supplying processors for tablets as low as $50---are key players in the entry level tablet market. How does Intel compete with that pricing? For good measure, you could include MediaTek, a Taiwan smartphone processor provider, as an Intel threat.

  • Report this Comment On February 02, 2014, at 10:33 AM, keeperoftheq wrote:

    Intel has lost $2.5 billion for 2013 in the mobile market.

    In fact, Intel's mobiles losses have doubled each year for three years in a trot.

    In 2014 it's not going to get any better, as Intel is subsidizing the purchase by OEMs of 40 million Bay Trail tablet chips. That will cost $20 per chip or $800 million in total. It's even possible that these figures will be higher, since Intel is believed to have an internal target of 60 million tablets. Therefore you should reckon on Intel losing at least $3.5 billion on mobile in 2014.

    in 2014, mobile will be subtracting over 20% of Intel's operating profits. That's huge for any company, but especially one which has seen flat top line growth for three years and is expected to continue that trend for a fourth year.

  • Report this Comment On February 02, 2014, at 10:38 AM, keeperoftheq wrote:

    The large vendors that could pay Intel’s higher margin costs and focus mainly on high-end smartphones, like Samsung and Apple, are determined to create their own custom silicon and retain a greater degree of control over their own IP. Intel has enjoyed some success with smaller OEMs like Motorola and Lenovo, but apparently can’t offer the kind of breakaway performance improvement that would drive serious OEM engagement.

    Read more: http://www.itproportal.com/2013/12/02/medfield-after-two-yea...

  • Report this Comment On February 02, 2014, at 10:46 AM, SSchlesinger wrote:

    A few years back when Mike Bell, the Apple iPhone guru joined Intel they had plans for a $175 reference phone. The idea was that a phone carrier like a Verizon or AT&T could have a true series of phones that they controlled, fulfilled by some small Taiwanese jobber who won the low bid. This was a decent plan, but it did put considerable risk and responsibility on the carriers.

    I think Intel is a bit more confident in terms of the market today to change plans from a tier four entry plan to a tier two entry plan in the smartphone market. They can't walk into the market and demand Apple's business. But they can take on an Asus, Motorola/Lenovo, LG, Sony, and dozens of other manufactures. These are manufactures who would benefit from having phones that are comparable to Apple's and Samsung in terms of performance. Intel can't strike two deals and command more than half the smartphone market. But it can strike 10 deals and find itself fairly quickly commanding 20% of the market.

    Wallstreet and investors demanded that Intel take on mobile. it's like the pipedream of when your significant other says "we should move to Hawaii." The reality looks much different then the dream. Intel doesn't have retained earning from mobile to develop mobile. It's taking money it's generated from desktops and servers and investing in mobile. But the results not only help that new business opportunity, There is learning and manufacturing capabilities that further help servers and desktops.

  • Report this Comment On February 02, 2014, at 12:08 PM, JeffreyHF wrote:

    Actually, Infineon/Intel had the Apple baseband business for several years, but lost it to Qualcomm. They couldn't provide leading edge parts, that timely featured stable hardware and software that could keep up with evolving wireless standards, and global needs for technologies and frequency bands.Nothing has changed in that regard.

  • Report this Comment On February 02, 2014, at 1:21 PM, keeperoftheq wrote:

    Intel questions its future in smartphone market

    Whilst smartphones are going up in sales, there is an "upstream supply chain" rumour that Intel is questioning whether to quit the smartphone market in 2015, as the firm is finding it difficult to break in, reports DigiTimes.

    Sources have pointed out that the firm is starting an internal evaluation and is weighing up whether to stop spending funds on the mobile business sector that has not seen noteworthy progress for the past few years. Also Lenovo's smartphone agreement with Intel, one of its biggest mobile backers in 2013, has now ended.

    http://hexus.net/mobile/news/general/65505-idc-smartphone-sa...

  • Report this Comment On February 02, 2014, at 3:04 PM, cahrens123 wrote:

    The success of Intel depends heavily on upcoming battery technology. They already have their foot in the door with their old netbook Atom processors. 99% of android apps work with both ARM and x86 since most of it runs on the Dalvik VM on a Linux kernel. Intel is working closely with Google to ensure that everything works flawlessly with the upcoming, currently available on Kit Kat as experimental, Android RunTime. Once the battery tech improves, and you can go 10 hours on an Intel Haswell, it's bye-bye ARM.

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