Intel Corporation (INTC)’s Mobile Strategy Needs Unprecedented Scale to Work

Page 1 of 2

Intel Corporation (NASDAQ:INTC) is in the sticky position of pursuing markets with falling gross margins, while its bread and butter PC business is experiencing short-run decay in demand. Long-term trends like cloud virtualization are reducing the demand for servers, as serve utilization is improving because the cost of running servers is being centralized by companies like International Business Machines Corp. (NYSE:IBM),, Inc. (NASDAQ:AMZN), and VMware, Inc. (NYSE:VMW).

Intel Corporation (NASDAQ:INTC)

Over time, I anticipate declining revenue growth from servers, modest to no growth in desktop and laptop processor shipments, with incremental growth in mobile processing.

Things aren’t that rosy

PiperJaffray analyst Gus Richard states:

We estimate that a system that uses a Silvermont processor will generate 1/5 to 1/2 the revenue for Intel than a Haswell processor. We think that this is the consequence of CPUs being ‘good enough’ and devices no longer driven by CPU performance. Moreover, we believe that the mobile and PC ecosystem are separate and distinct.

This could be potentially troublesome as Intel Corporation (NASDAQ:INTC)’s latest financial data reveals that a small decline in revenue means a substantial decrease in net income.

Source: Intel

Intel Corporation (NASDAQ:INTC)’s added revenue from mobile, even after partnering with Samsung, won’t be enough to move the needle on revenue growth. Samsung shipped 8.8 million units of its tablet in the first quarter, which would only generate about $176 million in revenue assuming $20 per chip, (Intel generated $12.5 billion in revenue in the first quarter). Intel’s mobile segment won’t be making any significant contributions to the company’s total growth anytime soon.

Mobile processors operate at extreme economies of scale, and unit volume composes a larger percentage of profit. If Intel isn’t able to price its mobile products at a level that’s similar to QUALCOMM, Inc. (NASDAQ:QCOM), Intel will not sell any units. Qualcomm’s Snapdragon chips costs $20 according to AllThingsD. So Intel’s profit margins are only going to shrink rather than expand in the post-PC -era. Intel shareholders may be sitting on their hands for a while before the company can turn in an awesome earnings season.

In the mobile space, it’s the down-stream suppliers like Apple Inc. (NASDAQ:AAPL), HTC, Microsoft Corporation (NASDAQ:MSFT), and Sony Corporation (ADR) (NYSE:SNE) that get to command higher profit margins. Mainly because they take on most of the risk, and are subject to changes in consumer buying habits, and have the most to manage in terms of pushing a product out onto the marketplace. Since Intel takes substantially less risk, its take-home profit isn’t going to be much. Qualcomm currently has 43% market share according to Strategy Analytics. The company generates $19.12 billion in revenue in its most recent fiscal year. Currently, Gus Richard forecasts Intel to generate $51.88 billion in revenue for fiscal year 2013. Intel Corporation (NASDAQ:INTC) would need to sell as many chips as Qualcomm in order to take in revenues that could off-set some of the decline in its PC, and server business. But because Qualcomm is a well-established competitor, I find it highly unlikely for Intel processors to dominate enough of the market.

Page 1 of 2