Intel's Mobile Group Loses Over $3 Billion in 2013

Yes, Intel's mobile group is losing its shirt, but it's necessary for long-term success.

Apr 16, 2014 at 12:03AM

For the longest time, it wasn't quite clear just how much Intel's (NASDAQ:INTC) mobile group was losing. Indeed, since the mobile group's results were part of the "Other Intel Architecture" group for the past several years, it was hard to separate that division from the more profitable "intelligent systems" group. Intel has now reorganized its reporting to give investors more clarity on what exactly is going on.

A big, gaping loss -- when does the pain end?
During 2013, Intel's Mobile and Communications group generated $1.375 billion in
revenue. On that revenue base, Intel lost $3.15 billion. Now, without knowing the gross margin profile of that division, it's hard to get a handle on the operating expenses. That being said, if we assume that the division (which mostly consists of low-end 2G/3G modems and a handful of apps processors) does gross margins in the 40% range, then this would suggest operating expenses of about $3.7 billion.

For Intel to break even -- assuming that operating expenses stay roughly flat -- at about the 50% gross margin level, the company would need to do about $7.4 billion annually. Now, do keep in mind that this represents a pretty serious chunk of the mobile market (modems, connectivity, and apps processors), so it'll take quite a bit to get to breakeven, let alone profitability.

What kind of market share does Intel need?
According to Strategy Analytics, the smartphone apps processor market is set to be worth a whopping $30 billion by
2018. The tablet processor market should be worth a cool $7.2 billion by 2018, again according to Strategy Analytics. If Intel can capture 35% of the tablet apps processor market and about 25% of the smartphone apps processor markets, that works out to over $10 billion in sales for the company -- not even including discrete cellular modems.

That may seem aggressive, but given the trajectory Intel is on with both its tablet and smartphone offerings, getting this kind of share in tablet/phone apps processors actually seems quite reasonable. This is a long-term game, however, and investors shouldn't expect wild profitability over the next few years (although the massive losses should come down nicely over the next couple of years).

Is it time to freak out?
Many will rightly note that Intel's mobile group losses are so wide that they wipe out over half of the operating profit of the company's datacenter business. However, focusing on short-term profits and ignoring the long-term strategic goals is the key to failure. Intel knows it needs to be a big player in both smartphones and tablets; otherwise it risks irrelevance. Intel is spending what it needs to in order to win, and long-term investors should understand that these "big losses" are a necessary move.

Indeed, with mobile-chip giant Qualcomm (NASDAQ:QCOM) investing probably at over $3 billion a year and given its first-mover advantage, it's neither easy nor cheap to catch up with such a behemoth. Qualcomm's mobile IP is best-in-class from the CPU to the modem, and developing all of that and building upon it requires a large investment. But if Intel's investments are successful, there will be a great long-term payoff.

While you wait for Intel to catch up in mobile, this stock could explode
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now, for just a fraction of the price of Apple stock. Click here to get the full story in this eye-opening new report.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple and Intel and owns shares of Apple, Intel, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information