As it stands, If Intel was to generate 25% of the unit volumes Qualcomm does, it would only contribute $5 billion in revenue to Intel. This assuming Intel gains 25% market share in both mobile processors, and mobile station modem. So it’s not very realistic to expect Intel’s mobile division to contribute much in terms of profit and revenue. Intel’s stock move was sentimentally driven rather than based on a change in the underlying fundamentals.
How to position
Don’t buy into the Intel Corporation (NASDAQ:INTC) mobile hype. While I understand that the company has a strong processor platform under Silvermont, the company would need to generate 25% of Qualcomm’s revenue in mobile in order to off-set the decline in PC, and server sales. If that is the case, Intel shareholders would be better served by investing into Apple.
I understand that Apple is exposed to many risks. But as it stands consumers want to buy Apple products. Apple customers remain loyal and have invested heavily into Apple app store purchases, and are likely to upgrade their previous iPhones into the next iPhone. This is driven by the fact that Apple devices are easier to upgrade, and you can bring your previous content collection of both programs, and songs to the next device using your Apple ID. This gives consumers the added incentive of owning an Apple device rather than an Android based device.
Apple trades at a fairly low earnings multiple, and projected to grow earnings growth because industry wide forecasts anticipate substantial growth in global shipments.
Some critics point to Apple’s decline in tablet market share as a good reason to sell the stock, but the decline in market share had to do with the average selling price of an Apple iPad being substantially higher than its competitors. Apple’s brand commands a higher premium, and, therefore, higher profit margins. The higher premium is what keeps the company at a 23.5% net profit margin.
Conclusion
Intel would need to sell a lot of processors in a short amount of time in order to garner revenues that could off-set the losses from falling PC and server shipments. Because of this, investors should be cautious of Intel Corporation (NASDAQ:INTC)’s outward looking guidance. Many of the high price-targets are driven by higher multiples on earnings. However, the only reason why investors would be willing to pay a higher multiple on earnings is if the company is growing earnings at a substantial rate. This is not going to be likely as Intel will be gaining market share against well-established competitors like Qualcomm and NVIDIA Corporation (NASDAQ:NVDA) over the course of 5-10 years. I expect Intel to gain market share incrementally, and this will disappoint shareholders who were hoping for a silver bullet.
Investors would generate higher investment yields by investing in companies further downstream like Sony, Microsoft, and Apple.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Qualcomm.
The article Intel’s Mobile Strategy Needs Unprecedented Scale to Work originally appeared on Fool.com.
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