Intel’s Tablet Ambitions Get Bigger

According to Digitimes, Intel (NASDAQ: INTC  ) has just landed orders for a whopping 16 million tablets targeted at education. Furthermore, according to the Taiwanese news outlet, Intel's internal goal is to ship not 40 million tablets during 2014 (which was the goal initially stated at Intel's Investor Meeting), but 60 million tablets. According to IDC, approximately 260 million tablets will be shipped during 2014, implying 23% tablet share.

If Intel can hit this goal, then this bodes well for 2015
From a financial standpoint, whatever tablet goal Intel actually hits during 2014 will have a fairly negative financial impact due to high contra-revenue to offset a high platform bill-of-materials cost. However, while this will hurt gross margins during 2014, things get much better as the contra-revenue essentially disappears in 2015.

To illustrate the point, let's work through the hypothetical financials with the following assumptions:

  • The average selling price for a Bay Trail-T is $20
  • The average contra-revenue per unit is $20 (Intel CFO Stacy Smith stated at the Investor Meeting that its next generation platforms would reduce the bill-of-materials by $20 against Bay Trail, so this is a reasonable amount to expect
  • Intel sells 60 million tablet chips (with contra-revenue) during 2014 and then grows that to 75 million without contra-revenue during 2015
  • Intel is able to command 50% gross margin per unit
 

2014

2015

Units

60 million

75 million

Revenue

$1.2 billion

$1.5 billion

Contra-revenue offset

$1.2 billion

-

Net revenue

$0.00

$1.5 billion

Gross profit @ 50% GM

-$0.6 billion

+$0.75 billion

So, if all goes as planned according to this Digitimes piece, Intel will be able to go from a $600 million loss to a $750 million positive gross margin. From a year-over-year perspective, Intel will actually add $1.35 billion in gross profit. Since this gross profit doesn't require any incremental operating expenses, it essentially falls to the bottom line. Assuming a 27% tax rate, this suggests an incremental $0.19/share during 2015 from 2014 levels.

As long as the PC client group decline slows and data-center grows, estimates too low
Take a look at the current analyst estimates (per Yahoo! Finance):

(Source: Yahoo! Finance)

Notice how the estimates call for a $1.53 billion increase on the top line and just a $0.14/share increase on the bottom line. Of course, if you assume that the PC market will accelerate its decline, and if you assume that data-center group revenue growth comes to a screeching halt, then the numbers work.

That said, with Intel's LTE ramp extending into 2015, the PC and tablet "merger" at the 14-nanometer generation potentially sustaining PC Client Group revenues going from 2014 to 2015, and growth in mobile apps processors implies that Intel could come in well ahead of these estimates. Oh, and if PC revenues actually come in better than expected during 2014, this once again bodes well for 2015 as the revenue base starts higher.

What does this mean for competitors?
With Intel looking to get extremely aggressive with market segment share, this could be a negative for the other merchant chip vendors. In particular, Qualcomm (NASDAQ: QCOM  ) -- which has seen some pretty substantial tablet market share gains during 2013 and 2014 -- could see its tablet-oriented chip sales growth slow. Further, any design-outs from more popular sockets (such as the Kindle Fire HDX or the latest Google Nexus) could further serve to sour sentiment. That said, tablets aren't a huge part of Qualcomm's chip business. 

The real losers would likely be Taiwan Semiconductor (NYSE: TSM  ) , as each Intel chip sold into tablets (at least once Intel's SoFIA -- the integrated modem/apps processor part -- is moved to Intel's own process) is a loss on TSMC's part. 

This argument also applies to ARM (NASDAQ: ARMH  ) which would for each Intel chip sold into a tablet lose pretty substantial IP royalties lost (and a big part of ARM's story is that it has had nearly 100% share and growing content share). The financial impact for ARM may not be as large as the "sentiment" impact, as ARM's essentially monopoly position on mobile chip IP is "broken" in the eyes of investors. In either case, Intel success in tablets (and eventually phones) could lead to multiple compression for ARM's stock.

Foolish bottom line
At the end of the day, Intel has no choice but to aggressively push into the tablet market in order to offset the loss of units at the low end of the PC market. If Intel can be very aggressive and actually nail that 60 million unit goal, then sentiment around Intel should improve and the stock could be rewarded with a meaningfully higher multiple than it commands today.

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Read/Post Comments (3) | Recommend This Article (3)

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 March 25, 2014, at 7:31 PM, fearandgreed2005 wrote:

    The momentum is just beginning to swing. With the 14nm product being cranked out now the swing is going to accelerate. The TSMC 20nm planar process is junk and I don't see them competing with 14nm FinFET for at least a few years. That means as we get into 2015 Intel will have the best chips for servers, PCs, tablets, phones, wearable gadgets, and everything else. Anything that gets in the way of Chipzilla will be crushed. I am long Intel.

  • Report this Comment On March 25, 2014, at 11:02 PM, techy46 wrote:

    Good article with very interesting projections. Intel's agnostic approach to SoC's is going to create a potentially huge 1-2 year investing opportunity. Intel's CFO's prediction that two survivors will split the SoC markets doesn't bode well for some players.

  • Report this Comment On March 27, 2014, at 10:37 AM, MeirElazar wrote:

    For anyone who wishes to understand Ashraf Eassa’s motivations and methodologies, I suggest you examine his article entitled “AMD Looks Finished” along with all of the reader comments. It was published on March 20th, 2014 in Seeking Alpha.

    http://seekingalpha.com/article/2099473-amd-looks-finished?i...

    I would particularly like to point out all of the comments relating to Ashra’s deletion of peoples comments. It indicates that Ashraf has comments of people opposing his view deleted, censored, and purged.

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