More Reasons Intel Shouldn't Quit Mobile

There's been a lot of chatter from the analyst community as of late urging Intel (NASDAQ: INTC  ) to reconsider its venture into the realm of mobile computing. While many Intel investors believe that exiting mobile would be a deadly long-term strategic error, others tend to focus on the nearer-term financial "gain" that Intel would see if it were to quit mobile, presumably leading to a higher stock price. However, in this article, I'd like to explain another reason giving up on mobile wouldn't bring the savings many believe it will.

Let's look at the numbers
Here's the breakdown of Intel's revenue and profit per operating segment over the past several quarters and for the full years of 2012 and 2013:

Source: Intel.

Obviously, the PC Client Group, or PCCG, is extremely profitable, and the Data Center Group, or DCG, is also quite robust. The Internet of Things group is also looking like a fantastic business, and all told, these three businesses generated a hefty $17.87 billion in operating income during 2013. The eyesore, of course, is the Mobile and Communications Group, or MCG, which lost a whopping $3.148 billion in that same period.

There is more leverage here than the loss implies
The initial, knee-jerk reaction would be that if Intel were to simply shut down MCG that those savings would fall right to the bottom line and the stock would be worth more at a constant earnings multiple. Unfortunately, this is absolutely the wrong way to think about it, simply because much of the IP/chip development that goes on in MCG is leveraged quite nicely by PCCG, DCG, and IoT. In short, while mobile products aren't directly generating operating profitability, much of that R&D is leading to profitability and margin gains in other segments.

For example, the Atom CPU cores and much of the system-on-a-chip IP that's developed primarily for smartphone and tablet products are reused to build low-cost (but high-margin) PC chips, as well as micro-server, communications infrastructure, and storage system-on-a-chip products. Further, Atom-based chips largely similar to their PC and tablet counterparts are sold into the Internet of Things division in things like in-vehicle infotainment systems and point-of-sale terminals. There is a lot of leverage that comes from that mobile investment.

The loss in mobile will narrow with sales volume
Addressing the mobile question directly, it's plain as day that the loss Intel is incurring now will narrow significantly on the following drivers:

  1. Elimination of the contra-revenue support required for this year's roughly 40 million tablets, and growth in that tablet volume (this is likely to happen at the expense of the weaker ARM Holdings (NASDAQ: ARMH  ) vendors before it encroaches on heavyweights like Qualcomm (NASDAQ: QCOM  ) ).
  2. A ramp of Intel's discrete LTE/LTE-Advanced discrete modems (this is probably the first real LTE competition Qualcomm is going to face).
  3. A ramp of smartphone-focused platforms (in particular, the apps processor).

So, if we make the following assumptions for 2015:

  • Intel ships 60 million tablet chips at an average platform selling price of $20.
  • Intel ships 50 million full smartphone platforms at an average price of $20.
  • Intel sells 30 million discrete modem/RF transceiver parts at an average price of $10.
  • Intel sees $600 million of legacy 2G/3G business.

Then Intel will recognize revenue of about $3.1 billion in its Mobile and Communications group. If we assume gross margins at the 45% level (they'll get better as Intel moves the high-volume parts in-house, and this is a pessimistic estimate to begin with), then assuming roughly $3.7 billion in operating expenses (which is the implied operating expenses at 40% gross margins on the current revenue base), this should lead to an operating loss of about $2.3 billion -- a healthy improvement from a $3.2 billion loss during 2013 and what is likely to be a $3.5 billion to $4.0 billion loss in 2014.

Foolish bottom line
While it's easy to just say "shut down mobile," do remember that the PC market is stagnant at best and that mobile is where the high-dollar-content incremental growth opportunities lie. If Intel wants to grow its $53 billion-a-year revenue base meaningfully, it will need to succeed in both tablets and smartphones. The loss is painful for now, but Intel investors should be confident that this is the correct strategic decision and that Intel is unlikely to give up on mobile at any point in the foreseeable future.

Are you ready to profit from this $14.4 trillion revolution?
Every investor wants to get in on revolutionary ideas before they hit it big -- like buying PC maker Dell in the late 1980s, before the consumer computing boom, or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hypergrowth markets. The real trick is to find a small-cap "pure play" and then watch as it grows in explosive fashion within its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 trillion industry. Click here to get the full story in this eye-opening report.


Read/Post Comments (8) | Recommend This Article (6)

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 May 08, 2014, at 7:08 AM, JeffreyHF wrote:

    "If" my bubbie had batzem, she'd be my zadie.

  • Report this Comment On May 08, 2014, at 7:18 AM, masterwallstreet wrote:

    Intel could lose billions with multiple lawsuits

    In my opinion only, on June 12 the EU courts will make their ruling on Intel's antitrust monopoly violation. intel is using illegal tactics and immoral and unethical tactics. They are trying to destroy and sabotage AMD. They were issuing rebates to vendors for not carrying AMD products. That is illegal. The courts are going to make their decision on June 12. It could be a lot higher than $1.5 billion. How many lawsuits are going to follow afterwards? This is a smoking gun. If AMD sues Intel they could get a lot more than a few billion. How about class action lawsuits if you had AMD shares and the stock tanked because of Intel's illegal tactics? I would not be surprised to see a few class action lawsuits against Intel? The lawyers will jump on this like no ends. Less

  • Report this Comment On May 08, 2014, at 9:49 AM, SSchlesinger wrote:

    The only people screaming for Intel to get out of mobile are the paid bloggers that tried and failed to back down Intel by using the word "Bribes" for contra revenue. They were able to attract investors by making press releases that said the PC era was over (when it really wasn't). They drove up their stock to insane PE levels. Now this same group of people think that Intel investors are just as easily manipulated.

    If ARM really wants to compete they should move money out of PR and put it into subsidizing TSMC until they can get their 20nm yield issues under control. Intel is bringing the fight to ARM, it's too late to change that.

  • Report this Comment On May 08, 2014, at 10:10 AM, raghu78 wrote:

    Ashraf

    Intel 's MCM bleeding is because of heavy marketshare loss to Qualcomm's integrated LTE basebands in 2013.

    http://www.strategyanalytics.com/default.aspx?mod=pressrelea...

    http://www.strategyanalytics.com/default.aspx?mod=pressrelea...

    Qualcomm increased its marketshare from 52% in 2012 to 64%in 2013. Mediatek went down slightly from 12.5 in 2012 to 12% in 2013. Intel went down massively from 12.3% in 2012 to 8% in 2013.

    Intel has no integrated LTE baseband in 2014. Sofia 3G ships in Q4 2014 and Sofia LTE comes in H1 2015. So Intel is going to cede marketshare to integrated basebands in 2014. The bleeding will get worse. Q1 2014 MCM revenue is USD 156 million and down from USD 404 million in Q1 2013. This should drive home the point that Intel is losing baseband market share.

    2015 too is a difficult task. Qualcomm has integrated basebands across the stack. Mediatek is shipping integrated LTE in H1 2014 with devices expected in H2 2014.

    http://www.anandtech.com/show/7925/qualcomms-snapdragon-8088...

    Cherrytrail does not stand a chance against S810 in the premium smartphone market without integrated LTE. S808 will take care of Sofia 3G/LTE.

    http://www.mediatek.com/en/news-events/mediatek-news/mediate...

    http://www.mediatek.com/en/news-events/mediatek-news/mediate...

    "The MT6595 platform will be commercially available by the first half of 2014, with devices expected in the second half of the year."

    btw Intel has no chance of 50 million smartphone apps processor units in 2015. They are literally insignifcant in the phone market with 0.3% marketshare.

    http://www.prnewswire.com/news-releases/strategy-analytics-s...

    The story is same for tablets. lets see if Intel can sell 40 million tablet processors for 2014 before estimating 60 million unit sales in 2015. Intel sold 5 million tablet processor units in Q1 2014. Intel might at best sell 25 - 30 million tablet processor units in 2014.

    http://news.softpedia.com/news/Intel-5M-Tablet-Chips-Shipped...

  • Report this Comment On May 08, 2014, at 12:05 PM, TMFAeassa wrote:

    raghu78

    With all due respect, with Intel ramping XMM 7160 (in Galaxy Note 3 Neo and Galaxy K Zoom) and with XMM 7260 (rumored to show up in some models of Galaxy S5 powered by Exynos), I would imagine that baseband share has bottomed and is on the rise so taking this "rear-view mirror" approach seems to be counterproductive from an investment perspective.

    Intel will have integrated baseband + Silvermont during the entirety of 2015 on TSMC 28nm HKMG which is more than enough to compete with whatever Qualcomm and MediaTek will have for the full year, so 50 million doesn't seem to be farfetched there. Snapdragon 808 is a premium device, not a low end targeted one, so that's a pretty off-base argument.

    At any rate it seems that you want to see Intel fail/ anybody-but-Intel succeed, and while I respect this view, I can only suggest to you to act on your convictions and short Intel :-)

  • Report this Comment On May 08, 2014, at 2:40 PM, raghu78 wrote:

    Ashraf

    Cherrytrial has no chance against Snapdragon 810 with integrated 4G LTE/LTE-A. Sofia 3G / LTE will be fighting with Qualcomm and Mediatek's mid-low end range which. btw you don't decide the product placement for S808. Qualcomm does. They will give Intel a hard time. what matters is S808 die size and pricing.

    as for wanting to see Intel fail I want the democratization of computing power. It will happen eventually. By that I mean 3 - 4 chip manufacturers who are healthy and strong and capable of competing at the leading edge. In this case they are - Intel,TSMC, Samsung, Globalfoundries

    I don't expect the relative order to change but I do expect the last 3 to grow at the expense of Intel.

    I also expect 2 strong and vibrant ISA ecosystems - x86 and ARM - to co-exist.

    ARM with its licensees - Apple,Qualcomm,AMD and Nvidia will break Intel's hegemony in each and every market including servers and HPC.

    I expect this to happen gradually over the next 5 - 7 years but it will happen. There is a hell a lot of resources and talent outside of Intel which will make that happen.

    Its in every technology company's interest to see a weaker Intel and stronger foundries, stronger ARM, stronger AMD, stronger ARM licensees.

  • Report this Comment On May 09, 2014, at 3:15 AM, TMFAeassa wrote:

    raghu78

    "I expect this to happen gradually over the next 5 - 7 years but it will happen. There is a hell a lot of resources and talent outside of Intel which will make that happen.

    Its in every technology company's interest to see a weaker Intel and stronger foundries, stronger ARM, stronger AMD, stronger ARM licensees."

    Then place your bets accordingly and best of luck to you! We'll see how it all shakes out.

  • Report this Comment On May 11, 2014, at 10:28 AM, akaRAV55 wrote:

    @Ashraf

    You are irrational.

    " In 2013, Intel's mobile chip division lost a hefty $3.15 billion, after posting an operating loss of $1.78 billion in 2012. In the first quarter of 2014 alone, the Mobile and Communications Group saw a $929 million operating loss on a meager $156 million in revenue, according to new financial results issued today by the company."

    http://www.theverge.com/2014/4/15/5618126/intel-is-losing-bi...

Add your comment.

DocumentId: 2948704, ~/Articles/ArticleHandler.aspx, 7/29/2014 1:09:18 PM

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...


Advertisement