99.8% of smartphones have an application processor produced by a company not named Intel Corporation (NASDAQ:INTC). There are two ways to look at that number – either as a huge opportunity, or a massive failure.
I believe the former is proper way to view Intel’s smartphone position, and expect the company to grow its market share significantly over the next year and a half. As a result, shares appear undervalued for long-term investors.
Just as good isn’t good enough
The Atom Z2580 may have been a reach by Intel Corporation (NASDAQ:INTC) to get into the smartphone market before it’s too late. While the dual core 32nm chip is fast and relatively power efficient, there’s no compelling reason for smartphone vendors to switch.
It’s not good enough for Intel Corporation (NASDAQ:INTC) to be just as good as ARM Holdings plc (ADR) (NASDAQ:ARMH) designs, which dominate the market, it needs to be better. Switching costs for companies create a barrier of entry, which is why the 0.2% market share Intel grabbed is underwhelming, but mostly expected.
Doing one better
The problem is the Z2580 is a somewhat crude solution. The architecture isn’t specifically designed for smartphones unlike ARM’s chips. Intel Corporation (NASDAQ:INTC) plans to change that, however, with its Silvermont redesign of Atom for smartphones.
Silvermont offers both better performance and power-efficiency than the current Atom processor core by capitalizing on Intel Corporation (NASDAQ:INTC)’s 22nm platform. More importantly, it’s significantly more efficient than the competition’s ARM Holdings plc (ADR) (NASDAQ:ARMH) designs.
In Intel’s presentation of Silvermont earlier this month, the company compared its dual-core solution to the quad-core competition from ARM. While, the sample may suffer from some bias, the results clearly show a distinct advantage over some of the latest ARM designs. Intel says its chips provide a 1.6x max performance advantage and use 2.4x less power at the same performance as ARM’s chips.
Those numbers create a story vendors can use to sell smartphones – 60% faster and longer battery life. The switching costs will surely be negated if Intel delivers on those numbers.
Joining this generation
Intel is finally joining the fold of LTE solutions this year. QUALCOMM, Inc. (NASDAQ:QCOM) has largely dominated the 4G modem market, and currently controls about two-thirds of it. In a head-to-head performance comparison conducted by Signals Research Group, Intel captured top honors for its LTE chipset. Those chips will start shipping within a few weeks, and ought to be able to capture a large portion of the standalone modem market. That market is generally tablet based, however, where designs often come with an optional baseband modem.
Most smartphones use modems integrated into the applications processor. This helps save power, and therefore allows for longer battery life.
QUALCOMM, Inc. (NASDAQ:QCOM) found a major success in this area with its integrated LTE Snapdragon chipset. The company got its chips into popular phones by HTC, LG, Sony, and even the vertically integrated Samsung’s Galaxy S4 (albeit the U.S. version only).
Intel plans to release an integrated LTE chipset by the first quarter of 2014. Based on the performances of its newest standalone applications processor and LTE modem, the company could have a real winner on its hands as more vendors adopt 4G capabilities.
Is there even room for Intel?
The two biggest smartphone vendors, Apple and Samsung, prefer to use their own chip designs based on ARM architecture in their phones. Occasionally, Samsung will make an exception (see: U.S. Galaxy S4), but Apple is about as closed a system as it gets. Still, Qualcomm was able to capture 43% of the smartphone processor revenue share in 2012. Apple and Samsung combined for 27% of the market, although that number is skewed due to vertical integration. The point is, there’s a good chunk of the market that’s wide open for competition.
Furthermore, shifts in the smartphone market happen very quickly. For instance, Texas Instruments Incorporated (NASDAQ:TXN) was nearly even with Qualcomm in terms of market share in 2010. Now, the company isn’t even trying to compete, halting investment in the market in the fourth quarter of 2012.
With smartphone vendors redesigning phones and making new phones every year, they’re constantly trying to maximize the balance between dollars, performance, and power use. I believe Intel’s next generation of chips will provide high-end phone makers with an excellent value proposition.
A growing market
In 2012, the smartphone application processor market totaled $12.9 billion in revenue, while the baseband processor market reached nearly $18 billion. Combined, analysts believe the two markets could reach $50 billion in 2014.
Intel is setting up to capture a significant chunk of that $50 billion market in 2014. 2012 was the year Intel caught up with the competition’s capabilities, 2014 is the year it takes the lead and starts to take away the competition’s market share. After that, Intel’s leading edge technology ought to help that market share continue growing.
The article Intel’s Smartphone Opportunity originally appeared on Fool.com and is written by Adam Levy.
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