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2 Areas Where Intel Needs to Boost Investments

By Ashraf Eassa – Apr 25, 2018 at 7:00AM

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Here's where Chipzilla is falling behind.

Chip giant Intel (INTC -2.31%) is among the top research and development spenders in the world. The company plunked down about $13.1 billion for R&D in 2017, which represented a small but measurable increase from the year prior. Intel reported net revenue of $62.7 billion in 2017.

While Intel spends a ton on R&D, the company has a lot of irons in the fire. Not only does it have to invest in its core PC and data center processor businesses, the company is expanding into new areas like artificial intelligence chips, self-driving cars, and non-volatile memory. 

All those investments don't come cheap, especially as Intel tends to aspire to leadership market share.

With that in mind, here are two areas within Intel that I think could benefit from increases (perhaps substantial ones) in R&D spending. 

A wafer of Intel processors

Image source: Intel.

Manufacturing technology

Historically, Intel had clear leadership in chip manufacturing technology -- something that gave the company a pretty sizable leg up in the marketplace. More advanced manufacturing technology allows chipmakers to develop faster, cheaper, and more power-efficient products. 

In recent years, though, Intel's execution has slipped while its competitors have stepped up. That has allowed Intel's competitors to effectively erase the lead that Intel once had and, in some ways, even pull ahead. 

If Intel intends to continue building its own chips, I think it should double down on its investments in the development of chip manufacturing technology. While throwing money at the problem isn't a surefire solution to all technology development woes, I do think it would be in the company's best interests over the long term to increase spending here. 

At a bare minimum, increased spending could allow Intel to pay its best talent more, and aggressively poach some of the best and brightest minds from its competitors.

Considering how manufacturing technology stumbles have hurt its business in recent years, Intel should spare no expense in making sure that the mistakes of the past stay in the past. 

Key intellectual properties

Another area crucial to Intel's success is its portfolio of technology intellectual properties (IPs) like CPU cores, graphics processors, and so on. These technologies define the company's products -- if Intel has best-in-class IPs, it will have best-in-class products. 

Intel needs to double down on its core IPs to make them more competitive in the market. Intel should invest more in areas where it's relatively strong (e.g. CPU cores, memory controllers, media) to ensure that it can extend its leadership positions there, and it should substantially increase its investments in areas where it's weak, like 3D graphics processors, image processors, and artificial intelligence processing technology. 

While it might be tempting to think that Intel has all these bases covered, there's evidence to the contrary. At an investor conference earlier this year, the general manager of Intel's Client Computing Group (CCG) admitted that he recently boosted the company's spending on processor technology development for his business unit -- a unit that accounts for more than half the company's overall revenue.

I get the sense that in Intel's quest to pursue a broader product portfolio, it may have neglected depth. With a bigger R&D budget allocated to core intellectual property development, Intel may be able to fill in any remaining gaps. 

 

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

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