Despite Margin Risks, Intel Corporation (INTC)’s Mobile Plan Is Necessary

In Intel Corporation (NASDAQ:INTC)‘s  second-quarter earnings call, CEO Brian Krzanich reiterated his plan to focus more on the fast-growing mobile device market. While this seems like a sensible strategy overall, it also presents several risks.

Intel Corporation (NASDAQ:INTC)’s new approach may hurt its margins. Mobile devices typically sell at lower price points than desktops, making it harder for their component suppliers to eke out profits. Also, there is more competition in the mobile chip market than in desktops, where Intel Corporation (NASDAQ:INTC) shares a duopoly with AMD. In mobile, there are multiple ARM based competitors in the market.

In the company’s earnings call (as transcribed at Seeking Alpha), Krzanich stated:

“These changes will drive a greater emphasis on Atom-based products bringing the full weight of our process and architectural leadership to the Atom family. We will move Atom even faster to our leading-edge silicon technology and focus on the SOC integration of key components like graphics, communications and other devices.”

Intel Corporation (NASDAQ:INTC) needs to focus more on mobile, because traditional PCs are not selling well. The potential to hurt margins with this strategy is a necessary risk.

According to IDC, PC shipments fell 11.4% year over year in the second quarter. Even Lenovo, which had been bucking the trend to pass Hewlett-Packard Company (NYSE:HPQ) for the PC market’s top spot, experienced a decline in PC shipments of 1.4%. Traditional PC giants HP and Dell Inc. (NASDAQ:DELL) continued their struggles, experiencing declines in shipments of 7.7% and 4.2% year over year, respectively. However, the numbers from the two are much improved from the previous quarter when HP and Dell Inc. (NASDAQ:DELL) experienced declines in shipments of 23.7% and 10.9% year over year, respectively.

In comparison, tablet shipments grew a monster 142.4% year over year, and smartphone shipments grew 41.6% year over year in Q1. Furthermore, Microsoft Corporation (NASDAQ:MSFT) Windows 8 is still just sitting at a little above 5% in desktop market share in July, according to Net Market Share. Looking at the market trends, it is clear that Intel Corporation (NASDAQ:INTC) needs to succeed in mobile.

Haswell cannibalized?

Intel Corporation (NASDAQ:INTC) plans to launch Silvermont, its next generation architecture for Atom, in the second half of 2013. According to Intel, Bay Trail, an upcoming system-on-a-chip with Silvermont cores, will bring tablets that cost less than $150 to the market. However, there is some concern that Bay Trail might cannibalize Haswell, Intel’s new architecture for its Core processors. There will be some overlap because Bay Trail will also power desktops and Haswell is also aimed at tablets.