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Intel Is Making More Money Than You Think

Ashraf Eassa
December 21, 2013

Intel (NASDAQ: INTC) has seen stagnant revenues and declining profits over the last couple of years. This hasn't been well-received by investors -- the stock is stuck in a pretty narrow range while the NASDAQ hits record highs. But it's important to understand just why the company has seen year-over-year earnings declines. It's really not as bad as one would initially think.

The mobile investment is huge
During fiscal year 2013, Intel is set to post an operating loss of about $2.5 billion in its Other IA division -- i.e. anything and everything mobile -- on about $4 billion in sales. Assuming that gross margins in this division are about 50%, this would imply that operating expenses are running hot at about $4.5 billion. This is a significant investment, and the company has yet to really see a meaningful return on that investment. But it's OK, and here's why.

Chips -- processors, modems, connectivity, and so on -- have a pretty long development cycle; developing a modern processor and surrounding CPU can take more than four years from initial concept to shipping silicon. So, the efforts that investors are seeing coming out today are really projects that started back in the 2009-2010 time frame, when Intel's budgets in the low-power space were relatively anemic.

The payoff is coming
The huge investment that Intel is making in mobile will begin to really pay off starting in 2014. From a financial perspective, Intel is actually going to see a wider operating loss in 2014 than it saw in 2013 --  think along the lines of a $3 billion loss. However, this loss will be used to enable Intel to use brute force to enter the tablet space. Indeed, the company announced that it is aiming to ship at least 40 million tablets, which translates into about 20% of the entire tablet market.

Unfortunately for the actual profitability aspect of the situation, Intel is going to be aggressively pushing a high-end tablet platform into mid-range and low-end devices. This means that Intel needs to provide subsidies to offset the increased bill of materials that these high-end chips require. However, by the time 2014 is out, Intel will have rolled out new platforms to remedy the bill-of-materials disadvantage.

Until then, look at how much money Intel's other businesses make
Intel's PC client group is on track to earn about $12 billion in operating profit in 2014. Its data center group is set to earn a little over $6 billion in operating profit and, although fairly negligible, its software and services group will also turn in a couple hundred million in operating profit, as will its NAND flash division. If one excludes the operating loss from Atom, this adds back about $0.38 per share to the bottom line.

This investment is necessary
The biggest growth markets in computing, and the market in which Intel's chip prowess can add meaningful value, is the mobile market. With PCs flat to down, Intel needs to find new avenues for growth -- smartph