Some technology companies have been labeled “old tech.” The three companies that I’ve heard this most about are Intel Corporation (NASDAQ:INTC), Microsoft Corporation (NASDAQ:MSFT), and Cisco Systems, Inc. (NASDAQ:CSCO). These three former darlings of the investment world have been criticized for not adapting fast enough, and not sharing their wealth with shareholders. While Cisco has enjoyed a decent run recently from better results and a higher dividend, Microsoft and Intel seem somewhat stuck. These companies are seemingly attached at the hip, and ironically they may be about to help each other yet again.
Investors who are bearing on Intel would say, ARM Holdings plc (ADR) (NASDAQ:ARMH) seems to own the mobile market for processors. Intel’s size may not matter. While it’s true Intel’s move toward mobile has been slow, don’t count out the chip king yet.
I own an iPad and I love it, however when I need to do real work, I use my laptop. If PC manufacturers could have exploited the “Intel inspired” Ultrabook prior to the iPad, I’m not sure the tablet market would be as big as it currently is. Apple’s iPad and Samsung’s Galaxy lineup dominate the tablet market. The fact that both use an ARM licensed chip design, and neither runs Windows has to be bad news right?
Not so fast, Intel Corporation (NASDAQ:INTC) and Microsoft dominate the Ultrabook scene, and as manufacturers dream up new ways to design these devices, the line between tablet and laptop is already becoming blurry. With companies like ASUS, Dell Inc. (NASDAQ:DELL), Hewlett-Packard Company (NYSE:HPQ), Lenovo, and others coming up with less than 3 lb. Ultrabook designs, this concept is almost certain to take tablet market share.
Don’t Count This Out Yet
You would think the start button was a national monument for all of the talk of it being removed in Windows 8. In truth, Windows 8 is a step Microsoft had to take, and Intel is more than happy to be along for the ride. Windows 8’s ability to be used on PCs, tablets, and smartphones is something only Microsoft offers at the current time.
While Windows 8 is a drastic change, I wouldn’t go betting against this operating system just yet. First, Microsoft reported a 24% increase in revenue from the Windows division in their current quarter. Second, with 60 million licenses sold, there are a whole lot of people already using the system. Third, Microsoft’s Surface tablet is designed to show customers what the Windows 8 experience is supposed to be like. The fact that Intel resides inside the Surface Pro, and many other Windows 8 tablets is great news for the company.
The Future
Even if Windows 8 and the Ultrabook breathe new life into Intel and Microsoft sales, both companies need to win in mobile. The sheer size of the mobile market means the opportunity is too large to ignore.
ARM is the big dog when it comes to mobile chips, and it seems imperative that Intel find a way to compete more effectively. While Intel is both a chip designer and manufacturer, ARM tends to license its designs. This accounts for the fact that ARM’s recent gross margin was 94.77% compared to Intel’s gross margin of 58%. While the difference in gross margin is something Intel can’t easily adjust, there is one thing Intel simply must do more of.
One of the keys to success in the technology industry over the long-term is spending on research and development. Intel spends as much on R&D in a quarter, as ARM makes in revenue in six months. However, I’m suggesting Intel needs to spend more. As a percentage of sales, ARM spends 28.19% on R&D. By comparison, Intel spent 19.51% in the current quarter. Intel is already running the race from behind and can’t afford to let ARM keep the lead.
