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Is Intel Corporation (INTC)’s Empire About to Strike Back?

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Over the past decade, chipmaker Intel Corporation (NASDAQ:INTC) has become the perfect example of a slow growth tech stock. With its fortunes tied closely to Microsoft Corporation (NASDAQ:MSFT)’s Windows PCs, Intel has struggled in recent years to stay relevant in the world of mobile computing. Although Intel only had one main rival during the 1990s – Advanced Micro Devices, Inc. (NYSE:AMD) – today it faces a much more dangerous adversary, ARM Holdings plc (NASDAQ:ARMH).

Intel Corporation (NASDAQ:INTC)

ARM, which licenses its technology to hardware manufacturers without producing any chips of its own, has risen on its industry reputation as a lower-powered chip best suited for mobile devices. Therefore, the bear thesis for Intel Corporation (NASDAQ:INTC) is simple – slumping PC sales exacerbated by a failure to enter the mobile market will lead to Intel’s slow demise. However, several recent developments now indicate that rumors of Intel’s death were greatly exaggerated, and that Intel could be poised to rise again.

Identifying the threat

Intel Corporation (NASDAQ:INTC)’s battle against ARM Holdings plc (NASDAQ:ARMH) is a tough one. Through its licensing agreements, which allow its hardware partners to modify its processing architecture for a myriad of purposes, ARM is all over the mobile map. NVIDIA Corporation (NASDAQ:NVDA), QUALCOMM, Inc. (NASDAQ:QCOM), Texas Instruments Incorporated (NASDAQ:TXN), Samsung and Advanced Micro Devices, Inc. (NYSE:AMD) all license ARM-based technology.

As a result, ARM-based processors now account for over 95% of the smartphone market, 80% of digital cameras, 40% of digital TVs and set top boxes, and roughly 10% of the mobile PC market. Research firm IHS predicts that 23% of the PC market will run on ARM processors by 2015, thanks to Microsoft Corporation (NASDAQ:MSFT)’s new ARM-based Windows RT. ARM Holdings plc (NASDAQ:ARMH) previously stated that it believes that its market share of smart TVs will also rise to a range between 70% to 80% by 2016, effectively locking Intel out of the lucrative smart TV revolution as it did with smartphones.

One area where ARM has a disadvantage is in the high-end servers market, which is still dominated by Intel Corporation (NASDAQ:INTC). However, ARM recently released higher-end CPUs aimed at the server market, which the company claims are more power-efficient that Intel products. Even though this is a new market for ARM, analysts believe that it could claim up to 5% of the server market by the end of 2013 – an impressive rise from 0% last year.

Finding a solution

Intel Corporation (NASDAQ:INTC)’s previous CEO, Paul Otellini, was sharply criticized for his decision to sell the company’s XScale embedded and mobile processor business (which licensed ARM technology) to Marvell Technology Group Ltd. (NASDAQ:MRVL) in 2006. Otellini believed that Intel would fare better by producing its own mobile chips, such as the Atom, instead of relying on licensed architecture. He also thought that Intel’s x86 architecture could hold its own against ARM. Otellini was woefully wrong, and Apple Inc. (NASDAQ:AAPL)’s launch of the iPhone in 2007 and the subsequent deluge of Google Inc (NASDAQ:GOOG) Android products that flooded the market sealed Intel’s fate, as hardware manufacturers emphasized power-efficiency over raw power.

That’s why Samsung’s recent announcement to use Intel’s Clover Trail+ mobile chip in its high-end Galaxy Tab 3 10.1 has surprised investors. The Galaxy Tab 3 is Samsung’s flagship Android-based tablet that competes directly with Apple Inc. (NASDAQ:AAPL)’s iPad. At the end of the first quarter of 2013, Samsung controlled 17.9% of the global tablets market, a big jump from 11.3% a year earlier. Most of these gains were taken from Apple Inc. (NASDAQ:AAPL), which saw its market share drop from 58.1% to 39.6%. Prior to this unexpected agreement, Samsung had only used Intel Corporation (NASDAQ:INTC) processors for its Microsoft Corporation (NASDAQ:MSFT) Windows ATIV tablets, a considerably smaller market than its best-selling Android tablets.

If Samsung’s Intel-powered Galaxy Tab shows the market that Clover Trail+ is a more powerful and power-efficient chip than comparable products from ARM Holdings plc (NASDAQ:ARMH), then this could be the watershed event that makes Intel relevant again.

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