New Chip on Intel's Shoulder Could Mean Big Things for Investors

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That favorite smartphone of yours might just get smaller and better, thanks to Intel's (Nasdaq: INTC  ) innovation in the field of chip design. According to Intel, the company made something close to history Wednesday when it announced that it will be making processors based on its new 3-D transistor technology.

With the demand for electronic gadgets growing sharply in the middle of an easing recession, this move is sure to push ahead Intel's lead in cutting-edge chip technology. However, with plenty of competitors duking it out in mobile, how should investors approach investing in this space?

Intel's new baby
This new innovation will involve significant changes in the design of the transistor, the basic component of microchips. Intel has been working on this pathbreaking technology for 10 years, with the first announcements coming in 2002. This technology will be used in the manufacture of the 22-nm processors about to be released by Intel.

The new structure is called Tri-gate. The increased capacity that it brings is in keeping with Moore's law; observed in 1965 by Intel co-founder Gordon Moore, it states that the number of transistors on an integrated circuit has doubled every two years (though, initially Moore's law held a doubling every year) since the inception of the IC.

The most significant change in the design is that there are now three conducting surfaces on the transistor instead of just the one in the earlier planar model. This new technology is going to allow Intel to make more efficient chips that can be fitted into smaller electronic devices. According to Intel, these chips will provide a 37% power increase over 32-nm chips already in production. However, for the technology to be adopted, Intel will have to take its facilities up several notches, and this it plans to finish doing by 2012.

Gizmo battlefield
The reason chip makers like Intel are beefing themselves up is the burgeoning international demand for smartphones and tablet PCs. Last year, smartphone sales went up by a whopping 72%, according to Gartner. In a world where the thirst for sleeker, sexier devices has become insatiable, there's no telling where the sales figures will jump to this year and beyond.

In the first quarter of 2011, Intel had 80.8% unit market share in the PC processor vendor market, according to market research firm IDC. It is obvious that Intel will try to remain at the top and attempt to increase market share in other market segments. But there is impending competition from ARM-based chips developed by ARM Holdings (Nasdaq: ARMH  ) . The technology is licensable and is manufactured by chip makers such as Texas Instruments (NYSE: TXN  ) and Qualcomm (Nasdaq: QCOM  ) .

Chips built on ARM architecture are used mostly inside smaller, low-power-consuming devices such as mobile phones. They are also found inside tablet PCs and smartphones. ARM-based chips are also going to run the next version of the Microsoft (Nasdaq: MSFT  ) Windows OS, which will probably be targeted at a broader array of devices. IDC estimates 13% of PC chips to run on the ARM platform by 2015. As ARM gains popularity for its simplicity, Intel needs to make sure it continues to be at the top of the business in the long run. The new Tri-gate technology is its answer.

Also out to make a kill
As the market heats up, other players are also gearing up to put up a serious fight. Applied Materials (Nasdaq: AMAT  ) is paying $4.9 billion to buy Varian Semiconductor (Nasdaq: VSEA  ) in order to meet the high demand for chips arising out of growing popularity of smartphones and tablet PCs. It is evident that the road ahead for all areas of the semiconductor industry is filled with cutthroat competition as companies attempt to reposition themselves to compete for smartphone business.

Fools and chips
As long as people continue to love electronic gizmos like smartphones and tablet PCs, the chip market is going to remain hot.

However, the thing with technology is that mass scale technologies such as these are always conducive to the first movers. While the market gets flooded with gadgets, the ingredients used to manufacture them also grow in numbers. But in the long run, it will probably be only a few companies that manage to stabilize themselves in the global market by achieving a high product standard.

For the Foolish investor, the time might be now. Investing in some of the smaller stocks now might mean greater profits in the long term. But be careful where you put your money. With so many players in the chip maker market, finding those few winners might prove elusive.

Arunava De does not own shares of the companies mentioned in this article. Intel and Microsoft are Motley Fool Inside Value recommendations. Intel is a Motley Fool Income Investor recommendation. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a diagonal call position on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Applied Materials, Microsoft, Qualcomm, and Texas Instruments. Alpha Newsletter Account, LLC owns shares of Microsoft. 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.

Read/Post Comments (4) | Recommend This Article (24)

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 10, 2011, at 3:13 PM, puck42nt wrote:

    Intel is seriously undervalued. Chip sales are being driven not only by PC's but also servers that run the Internet along with Windows, Mac and Linux platforms. Unlike MSFT Intel dominates all of these. With the new technology breakthrough for low power devices, INTC is the one stock to own for the future. With earnings increase of 30% in the last quarter the stock is still trading at barely 10x future earnings. A P/E of 15-20 would yield a stock price north of 40.

  • Report this Comment On May 10, 2011, at 5:05 PM, techy46 wrote:

    Agree, Intel should be trading in 25-28 range not 20-23 range. If Atom 3D penetrates mobile space by year end then range could go 27-30. Microsoft is in the same boat but with NOkia nad now Skype they should move to 27-29 range and if Nokia pans out by early 2012 range goes to 29-32. It's going to be a realyy interesting horse race once the popularity of mobile is neutralized.

  • Report this Comment On May 10, 2011, at 5:47 PM, russfischer1013 wrote:

    That hit a new low watermark for meaningless bag of words,

  • Report this Comment On May 10, 2011, at 6:46 PM, CMFSoloFool wrote:

    The new Intel 3D chip is revolutionary in technology, this is for certain. But it's not just the technical breakthrough that is crucial, it's Intel's capacity, their scale, and their ability to consolidate features into their processor chips that makes them a potential juggernaut. There enormous success in PCs and Servers, over 80% of the market share, is where the honed that ability, and now that they have a low-power chip suitable for mobile they will focus that same ability on the mobile space. That ultimately drives down cost, improves margins for the gadget makers, and gives them a way to differentiate.

    As already mentioned, an ATOM 3D is already in the works and will be ready later this year, so a tablet-ready chip with 37% more processing capacity, which consumes half as much power is going to be ready for mass deployment before end of year.

    In addition, also bear in mind that Intel is currently the top producer of SSD, and they have been working on a special optical interface for SSD, which further strengthens their creds for a significant entry into the disk-less mobile space.

    I am personally betting on Intel, and frankly I would not be all that comfortable right now putting new money into ARM. Bear in mind that ARM is 2 or more years away from delivering a 64-bit chip, so it is unlikely that ARM will make a significant move upmarket into PCs or Servers, especially now that Intel has further solidified their technical lead.

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