In a recent presentation, Intel (INTC 0.64%) CEO Brian Krzanich offered up some very interesting perspective with respect to the company's efforts to build and ultimately sell chips (like applications processors, modems, connectivity, and so on) into mobile computing market. While Krzanich seemed optimistic that Intel's investments in the PC market would carry over into tablets, he was more cautious on the smartphone market.
In particular, Krzanich noted that while in developed countries the market is dominated by Apple and Samsung, regions like China are less concentrated among two very powerful players. Krzanich also suggested that, particularly for the phone market, it could potentially pursue more deals like the one it recently inked with Rockchip "over the next couple of years."
That said, as an Intel investor, it's worth digging further into Krzanich's comments to try to figure out what's going on.
Smartphones are needed to get to breakeven (or better)
During the same conference, Krzanich indicated that he expects the losses associated with Intel's Mobile and Communications Group ("MCG"), which are coming in at approximately $1 billion per quarter, to come down significantly during 2015.
More interestingly, if I'm interpreting Krzanich's remarks correctly, he expects that MCG could actually get to approximately breakeven by 2016.
As I wrote previously, the breakeven point of Intel's MCG looks to be roughly $6 billion per year (though this number will vary based on a number of assumptions, including gross margin). Strategy Analytics estimates that the size of the entire tablet applications processor market was $3.6 billion in 2013.
Though the tablet market is probably going to grow significantly by 2016, it doesn't seem likely that Intel can get to breakeven on just tablets, even with fairly aggressive market size, margin, and market share assumptions.
It appears to me that Intel needs to either substantially reduce its cost structure, or it needs to gain fairly significant share in the smartphone market.
Intel needs to put out more competitive mobile products
According to recent market share numbers, just under half of the smartphone market belongs to Samsung and Apple combined. This means that the other half of the market is, at least in theory, up for grabs.
Part of the problem that appears to have plagued Intel's efforts to capture its own addressable market is that it simply hasn't had competitive products out on time. If Intel can bring to market best-in-class products on time, then this could go a long way to securing share at many of the non-Apple/non-Samsung smartphone vendors.
Take, for example, Intel's recent win in the Lenovo Vibe X2 smartphone. While, per DailyTech, Intel's Atom Z3480 powers one variant of the device, another variant comes packed with a MediaTek MT6592.
In terms of processor and graphics performance, the Intel chip looks competitive, but it lacks the integration that the MediaTek chip has. The MediaTek chip also appears to have more competitive camera/imaging as well as video decoding/encoding capabilities.
So, just getting the product story straightened out would go a long way.
But what then?
One potential scenario is that Intel gets its mobile product story right, and can offer smartphone vendors very attractive products at low price points. What then?
Well, in an ideal scenario, Intel would be able to win fairly high-volume smartphones at companies like Lenovo, ZTE, Coolpad, and many of the other Chinese OEMs. In fact, both Lenovo and ZTE have shown a willingness to work with Intel, but I would guess that these relationships haven't been all that fruitful to date as a result of execution problems on Intel's part.
Further, companies like ASUS and Acer, though not terribly huge in the smartphone market, could also be valuable allies if Intel can deliver competitive products.
Finally, it's worth noting that even if Intel doesn't get huge volumes at first, smartphones are pretty complex and require quite a number of chips. Intel will be able to sell an applications processor and a baseband (either integrated or stand alone), an RF transceiver, and a connectivity combo chip solution (Wi-Fi, Bluetooth, and so on).
The opportunities really do seem to be there for Intel if it can deliver the right products.
Foolish bottom line
Intel is a great company, but its performance in mobile has been, to say the least, disappointing. Intel has the R&D might and the engineering talent to put together world-class products, but for some reason, execution has been an issue for the company's mobile group.
That said, I am cautiously optimistic that 2015 will be significantly better for Intel in both tablets and smartphones, and believe that the stock would trade substantially higher if the company can get even close to breakeven in mobile by 2016, since the erasure of a $4 billion operating loss -- barring some disaster on the part of Intel's PC and/or Data Center businesses -- could lead to substantially improved profits.
