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).
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.
The right exposure
For Intel Corporation (NASDAQ:INTC), partnering with Samsung could finally shift its exposure to the right part of the market. Right now, Intel holds an 80% market share of desktop chips, an 87% share of laptop chips, but only 1% of tablets and less than 1% of smartphones. More than two-thirds of Intel’s revenue is generated from PC sales. Research firm IDC estimates that global shipments of tablets will overtake laptops this year, and total PC sales will decline 7.8% in 2013. However, that decline is expected to bottom out soon, with sales projected to fall just 1.2% next year.
Increased expenses in recent quarters indicate that Intel Corporation (NASDAQ:INTC) is well aware of the challenges it faces. Last year, Intel’s R&D expenses were more than seven times as much as QUALCOMM, Inc. (NASDAQ:QCOM). This year, Intel is already outspending the world’ largest chip foundry, Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), to produce more power and cost efficient chips than its rivals. Intel forecasts capital expenditures of $12 billion this year.
Higher expenses
Industry watchers believe that this increased spending will lead to some impressive product releases this year. This year, Intel has already launched 22-nanometer Atom chips, and is progressing toward 14-nanometer designs next year. Smaller nanometer (the width of the lines on the chips) designs allow lower power consumption and faster processing speeds. ARM, on the other hand, is still stuck with 28-nanometer designs. Intel Corporation (NASDAQ:INTC) has also signed deals with Cisco Systems, Inc. (NASDAQ:CSCO), Microsemi and Altera Corporation (NASDAQ:ALTR) for its new business of high-end custom foundries, which could lead to other major contracts down the road, and spur its development of better chip designs.
This means that if Intel’s next-gen chips start to gain traction with other smartphone and tablet manufacturers, then ARM will be forced to start spending more heavily to hold Intel at bay. When that happens, Intel, which has a cash hoard of $17.2 billion, could easily outspend ARM, which only has $881.8 million in cash and equivalents.
Although a deal with Samsung, rapidly evolving technology and a slowing decline in PC sales are all catalysts for Intel’s long-term growth, the company still faces some major challenges. Mobile chips are still much cheaper than notebook, desktop and server chips, which means that Intel Corporation (NASDAQ:INTC)’s top line would only rising slightly on its gains in the mobile market. In addition, Intel’s projected 2013 capital expenditures will weigh heavily on its bottom line for foreseeable future.
However, Intel’s recent advances in smaller nanometer designs, its new foundries business and renewed focus on mobile expansion are reasons to be excited about Intel again. The company also has a new CEO, Brian Krzanich, who appears intent on making mobile processors a priority for the company through the formation of a new mobile devices group, headed by former Apple Inc. (NASDAQ:AAPL) and Palm executive Mike Bell.
I doubt that Intel Corporation (NASDAQ:INTC) will rally strongly this year, but it is stil a solid investment at current prices. The stock pays a 3.7% dividend, and is trading at 12 times forward earnings – a considerable discount for a tech stock that could take off again when its heavy investments pay off over the next few years.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel.
The article Is Intel’s Empire About to Strike Back? originally appeared on Fool.com.
Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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