1 Reason to Look Past Intel's Mobile Losses

Intel's mobile losses are bad, but the company is looking ahead at the Internet of Things to drive future revenue.

Jul 20, 2014 at 3:00PM

Earlier this week Intel (NASDAQ:INTC) posted its Q2 results, and with it investors will notice the company is still struggling to make a name for itself in the mobile market. But Intel's plans to make the so-called Internet of Things a major focus became more apparent as the company's revenues in that segment outpaced its current mobile ambitions. As it looks to build future revenues in IoT, Intel will have to battle mobile leader Qualcomm (NASDAQ:QCOM) to pull that off.

A quick look at the quarter
Intel's overall revenue was up 8% year-over-year to $13.8 billion, and net income was up 40% year-over-year to $2.8 billion.

But it's the company's mobile division that has many investors worried. Mobile revenue was down to just $51 million for the quarter -- plummeting 83% year-over-year. Those are terrible numbers for a company that built its entire business around being the leader of PC processors. Overall Intel's mobile group lost $1.12 billion in Q2, even more than the year-ago loss of $761 million.

The company's smartphone prospects are basically not existent at this point so Intel focuses on getting its chips into tablets. From the outside, this seems to be working, as the company's processors are now in more than 10 million tablets worldwide. Intel set a goal to have its chips in 40 million tablets by the end of this year. If it reaches that goal, Intel will have about 15% to 20% of the tablet market.

But as Re/code recently pointed out, Intel is basically paying OEMs to put its chips in their processors. Intel's trying to get it's foot in the door before it's completely pushed out of tablets, as it is with smartphone processors.

So as Intel continues to face serious issues in mobile, what is the company looking to for future growth?

Here's where the Internet of Things comes in to play.

A promising trend
Instead of betting its future on mobile, Intel is hoping that the Internet of Things -- where connected devices communicate with each other for everything from home automation to fleet management – will be its saving grace.

The company's IoT division already brings in more revenue than its mobile counterpart, and it's actually moving in the right direction. The chart below shows Intel's IoT year-over-year revenue growth, compared to its mobile division.

Intel Iot Mobile Revenue
Data Source: Intel SEC filing

Intel mainly makes its IoT revenue from selling small chips for connected 'things.' Earlier this year the company dove further into IoT with its Quark chip and small Edison development board.

By 2020, technology and services spending for the Internet of Things will reach $8.9 trillion and have an installed base of about 212 billion devices, according to International Data Corporation.

The large IoT market hasn't gone unnoticed by Intel's competition. Qualcomm -- a leader in mobile processors and baseband chips -- is making big strides in the Internet of Things as well. The company helped put together a group of tech companies earlier this year who will use Qualcomm's open source IoT standard called AllJoyn. The platform allows devices from third-party vendors to communicate with each other.

Intel is trying its hand at its own open source platform as well, and created the Open Interconnect Consortium earlier this month to help make that happen.

While Intel's Internet of Things revenue and IoT platform are promising, the company will have to battle it out with Qualcomm over the next few years. It's still very early in the IoT game and it's unclear whether Qualcomm, Intel, or some other company's platform will catch on. If Qualcomm's AllJoyn takes off, you can be sure the company will try to use that to sell more chips.

Even if Intel's platform doesn't gain wide acceptance, the company can still make money selling Quark and other processors for IoT.

Investors should keep a close eye on Intel's Internet of Things revenue going forward, and look for any major shifts either up or down. Intel is focusing a lot of attention on IoT and it needs to deliver. As its mobile division loses money and PC growth continues to slow, Intel needs a new revenue generator for the next decade -- and the Internet of Things has a lot of potential to fill that void.

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Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, 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.

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