One of the biggest questions Intel (NASDAQ:INTC) investors have is just how much money the company can (NASDAQ:INTC) make as a mobile chip supplier. The common argument is that Intel probably can't make anywhere near as much as it does on its PC chips, which is probably true. But the argument that it can't make a healthy profit probably doesn't hold water from a longer-term perspective. Let's work through the math here.
What's the breakeven point?
According to Intel's most recent earnings report, the company did about $4 billion in sales in its "Other IA" group, which includes mobile products. The operating loss for this division was about $2.5 billion -- a pretty staggering loss. Given that the gross margin for this division is probably lower than the 60% corporate average -- let's call it 50% -- this implies operating expenses of $4 billion.
Assuming that in the longer term Intel can bring the gross margin up to 60% -- once it moves its modems in-house -- it can break even at about the $6.7 billion mark. This implies about 67% revenue growth from current levels -- not particularly difficult to do, given that there are a billion smartphones and more than 200 million tablets sold per year. According to Strategy Analytics, the smartphone apps processor market was worth a whopping $18 billion during 2013, and Intel's market share was a negligible 0.2%. Also according to Strategy Analytics, the tablet apps processor market was worth $3.6 billion during 2013.
So, what does Intel need to capture?
We've got an $18 billion smartphone apps processor market that is still growing nicely and a $3.6 billion tablet apps processor market, which works out to about a $21.6 billion opportunity in aggregate. A portion of this market is captive, i.e., Apple and some Samsung tablets. But of this combined tablet/smartphone apps processor market, Intel needs to capture only about $2.7 billion worth -- about 12.5% of the market.
This won't happen overnight, particularly as Intel faces fierce competition from Qualcomm (NASDAQ:QCOM), which holds 54% smartphone apps processor share and is the leading vendor of chips in non-iPad tablets according to Strategy Analytics. But Intel has the research and development and the scale to succeed once it has the right products.
Long term, if Intel can maintain share of about 25%-30% of the combined mobile apps processor revenue share, then it's pretty clear that the company can bring its Other IA business to respectable profitability. Of course, this requires that Intel execute properly, which it is getting much better at, and that Intel can overpower the competition with both design competence and manufacturing superiority. Intel will probably eventually do well in mobile, but the key right now is to simply erase that large operating loss by ramping to scale.
Foolish bottom line
At the end of the day, the most important thing for Intel is to simply erase the operating loss in mobile. Eventually, this can be a business that generates a decent amount of profit, but that's a ways off. For now, Intel needs to get a foothold -- by any legal means necessary -- and then from there grow it to scale. This isn't going to be easy, particularly against a backdrop of a weak PC market and worse-than-expected growth in the server market, but it's what the company needs to do in order to thrive rather than merely limp along.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.