Conventional wisdom is that Intel is an old tech has-been, in the mold of innovation laggards long past their prime. Whereas it seems evident that Dell, Hewlett-Packard, Microsoft, Cisco, Research in Motion and Nokia are joining Digital Equipment, Lotus, Burroughs, Sperry and Motorola as former leaders that have hit the wall, Intel belongs far from that list. The argument is straightforward: Intel remains a tech innovator, high up on the list of Cloud and mobility winners. That thesis is about to emerge into clear view as second quarter earnings are reported and second half outlooks are framed.
This doesn’t mean there won’t remain ample fear, doubt and uncertainty over the world’s largest chipmaker’s future. The view that early ARM processor success in iPhones, iPads and their many wannabes will not just sustain, but will ultimately carry over to other computing implements like PCs and servers is so entrenched that Intel’s P/E remains buried in cyclical oblivion. No matter the fact that sales are growing at a rate better than triple that of the broad economy, that profit margins are rising, or that cash flow is so robust the shares sport a near-4% dividend yield. Wall Street has just tuned out the story.
Far be it for the last word to be found on these pages. As readers well recognize, the past several years have proved dynamic! – that’s dynamic with an exclamation point, underscored, bold faced. It’s not just that the American economy rose inexplicably from the ashes of despair – which had nearly all forecasters calling for ongoing disaster, either ushering their clients into emerging markets, commodities and fixed income or filling up the mattresses. Contrary to hopes of greater jobs creation after last fall’s House sweep, businesses continue to hunker down, unwilling to add staff in spite of banner profits.
Ordinarily by this time in a business cycle expansion – this one now clearly led by manufacturing industry and vibrant export markets – companies would be pursuing future market share opportunity against foreign and domestic rivals. Record profitability and cash reservoirs would be converted to expansive managerial action to build for a better future. Instead of focusing on the hundreds of billions in emerging markets seeking an open trade path to peace and prosperity, many remain in current mode, sights set fixed on unfolding political events in Washington, Brussels, Berlin or Athens.
Certainly politics have much to do with investing and economic analysis, but the story since 2002 has been the extraordinary sales and margin opportunity in the developing world, as nations largely outside the capitalist system get plugged in. The benefit to established nations’ capital goods, industrial raw materials, agricultural foodstuffs, technology and luxury goods suppliers have grown commensurately. The past two years-plus upturn is extension of this now nearly ten years old mega-trend, interrupted only by the 2007-2008 financial implosion and shift in U.S. political orientation.
Technology investors have quite successfully made hay from mobile broadband access and the shift from desktop to Cloud. Now bristling with services and applications, this virtual Internet has nearly everyone beating a path to multiplicitous doors seemingly offering all things to all people – social networks, fulfillment shopping and more. Intel, a large firm with legacy responsibilities, is just now emerging from thirty years of PC dominance into this new world, with both incumbent dominance and new aspirations.
In the short term, several discontinuities have upset Intel’s cart: the launch of the iPad slowed notebook PC sales last summer; the Japan earthquake interrupted supply chains; and now, Apple is seeing sterling Macbook Air success. Recent word that Cupertino is doubling Macbook Air production has thrown the PC market into turmoil, with incumbent original equipment manufacturers scrambling to field comparable models as they limit production of older varieties. Taiwan distributors are unwilling to hold non-Apple inventory until the dust settles. Dynamic random-access memory (DRAM) demand has clearly suffered, driving prices into the ground. Yet Apple is likely to soon increase component orders, igniting a strong chip second half.
With next generation Macbook Airs based on Intel’s latest Sandy Bridge processors, the latter can now argue to those building Air clones they’ve got the only viable solution. nVidia graphics are no longer an option due to power consumption and cost, neither is AMD, due to power. Elimination of key chip rivals is a big win for Intel, which is clearly concerned with Apple outpacing the PC pack. Stepped up U.S. supercomputer funding and ongoing data center building is additive to low-end Automatic Sample Processors (ASPs), 4x that of the late 1990s.
The just introduced Sandy Bridge ultra low voltage (ULV) pricing sustains upward mix ASPs, with the upcoming $999 Macbook Air sporting a $200+ processor. That processor will be followed up in nine months with a 22nm Ivy Bridge ULV that nearly halves power consumption. This will morph into low end $95 22nm ULV parts by this time next year, prospectively bolstering unit demand and even giving the iPad a run for its money. With DRAM, LCD batteries and solid state memory materially cost-reduced, Intel garners the highest capture rate ever. This is hardly the sign of a tech laggard. In fact, just the opposite.
Should the likes of HP, Lenovo and Dell field Ultrabooks with the same Intel processors at $899 with solid state memory, or $799 with a hard disk drive, Intel content only further increases. Then Intel could execute on a $95 i3 ULV CPU at 22nm – its revolutionary 3D Tri-gate production process - next summer, and a $599 Ultrabook market could explode, with ARM headed off at the pass. Apple’s ecosystem allows it to hang out with a $799 Macbook Air, gain mainstream enterprise acceptance and better than double market share in two years – devastating any and all rivals.
Apple’s tablet and Mac strategy is two-hinged, and very relevant to Intel’s emerging opportunity. On the consumer side, Apple squeezes competitors between iPads and Airs; the former Internet and multimedia consumption platform lasts up to 10 hours, while the latter today lasts just 5 hours with a higher performing CPU, graphics and Mac OS. A new Macbook Air capable of being placed in iOS5 mode would see significantly longer battery life, enticing large enterprise with its portability, sync to the Cloud, productivity applications and security not found on iPad. Macbook Pro is an easy next step.
Thus, Intel keeps Apple PCs while other customers move rapidly to Ultrabooks. Ultrabooks will be terrific implements, but they won’t tie to the Apple ecosystem. Even with negligible non-Apple PC unit growth, Intel’s mix ASP and sales volumes will rise. Data Center software continues to rise above the 15% forecast rate – we see no reason why the recent 30% annual gains cannot sustain – and overall 2011 revenue handily exceeds Wall Street consensus. 2012 represents another solid growth year for Intel’s core businesses, validating the aggressive capital outlays already announced. Tablets and smartphones will be next.
Some of our assumptions:
- Data Center’s growth is a given, as the move to the Cloud is far from slowing.
- The AMD/nVidia cannibalization is already occurring, the only question is to what extent and how quickly. Their combined annual revenue is $10 billion. With tablets cannibalizing low end PCs, each company continues to garner high-end graphics, but Macbook Airs and the forthcoming Ultrabook seems to count them out.
- Forthcoming iPad and Macbook Air models illustrate the trade-off between form factors. Versus today’s 32nm cherry-picked (hence higher cost) ULV processors at 17W TDP, the 22nm Ivy Bridge will enable 10W-12W TDP, with Haswell getting that down to 7W with natural die yield. This means very low cost, very low power parts in 2013 for what should prove a PC mass market, with the squeeze on tablets/pads being even greater should they come with lesser featured Atom.
- Compared with something like 20% of 32nm Sandy Bridge yielding 17 W TDP parts, 22nm Ivy Bridge will probably push this to 50%, consistent with Intel comments that Ultrabooks will comprise 40% of 2012 mobile PCs. Haswell in 2013, also 22nm, will push this to near 100%, while enabling 7W TDP on low distribution parts versus 10W on Ivy Bridge. ASPs will continue in the $220-$300+ range, with Apple converting Macbook Pro to 17W Haswell in 2013 and eliminating AMD graphics.
- 22nm allows Intel to ratchet down TDP, improve yield and maintain a standard ASP price list on smaller cached processors targeted at lightweight, longer battery life PCs – possibly interchangeable with tablets. Thunderbolt on Macbook Air and Ultrabook is another key hurdle for competitors.
Conclusion: Intel is today valued as Old Tech, providing a huge investment opportunity if just some of the breaks go their way. The caveats are many: tech is dynamic, prone to change unexpectedly and even abruptly. The past year has been all Apple and ARM. It could just be the next year, or two, will see Intel regain its footing. That’s our case. Buy.
Rick Whittington is affiliated with TechIndicators, a firm that provides semiconductor and technology insights to institutional investors. He may own some of the stocks referenced in this and other stories.
- emerging markets
- Wall Street
- exclamation point