Over in Seeking Alpha, author Anchorite argues that Intel's (NASDAQ:INTC) "Internet of Things Group" will not be able to generate significant profit. Central to Anchorite's argument is the notion that the kinds of chips that Intel sells into this segment carry significantly lower average selling prices and margins relative to, say, the company's PC and server chips.
I respectfully disagree with the author. Here's why.
There's more to the Internet of Things than just $1 chips
At Intel's investor meeting last year, Doug Davis -- the General Manager of the company's Internet of Things group -- gave an extensive presentation on the company's strategy in this market.
One of the most interesting slides in the presentation was the following:
The slide breaks down the total addressable market within the Internet of Things group by type of processor.
Although low-performance/power micro-controllers make up the majority of the unit total addressable market within the Internet of Things (and the slide indicates that Intel has no plans to play in the $10 billion sub-32 bit microcontroller market), there seems to be plenty of high margin/average selling price business.
For example, Intel's served addressable market within the overall Internet of Things market adds up to an opportunity worth $8.7 billion today (and the overall market is probably going to grow over time).
It is certainly true that an $8.7 billion served addressable market is nowhere near as large as the opportunities that Intel has in the PC and server chip markets, but it is hardly a revenue opportunity worth scoffing at.
What about margins?
It's worth keeping in mind that the silicon that Intel sells to its Internet of Things customers are by-and-large similar, if not identical, to what it sells in its PC and data center markets. This alone would likely imply that from a gross profit margin perspective, Intel's Internet of Things group should be around corporate average.
This strategy likely allows Intel to get significant operating margin leverage as it doesn't have to reinvent the proverbial wheel when it comes to many of the silicon solutions that it offers to customers.
That said, Intel executives have stressed that it strives to not just sell silicon to its Internet of Things customers; instead it aims to provide complete hardware and software platforms. There are a number of advantages to this.
The most obvious one is that the more value Intel can provide in a given platform, the more revenue and ultimately margin dollars it should be able to see per customer.
Perhaps a less obvious advantage is that by providing full platforms (which include software) to customers, said customers will find it more difficult to switch to competing solutions.
Internet of Things can't replace PCs and servers, but it's nice to have
Obviously Intel's Internet of Things group doesn't bring in anywhere close to the kind of revenue that its PC and server groups do; those two businesses are incredible large, successful, and quite unique within the overall semiconductor market.
However, as an Intel shareholder, I think the Internet of Things Group is a welcome addition to the company's portfolio of businesses and a great opportunity for the company to leverage silicon from other business units to generate additional (and material) revenue and profits.
Ashraf Eassa owns shares of Intel. The Motley Fool owns and recommends Intel. 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.