Agreement With Rockchip To Help Intel Reach Its Target Of Shipping 40 Million Tablets In 2014

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Last week, Intel (NASDAQ:INTC) announced a strategic agreement with Rockchip, a leading Chinese fabless semiconductor company and mobile-internet system on a chip (SoC) solution provider, to expand its low-cost tablet offerings. The two companies plan to deliver an Intel branded quad-core mobile SoC platform integrated with Intel’s 3G modem technology, targeted primarily at the low-cost Android tablet segment. The agreement accelerates Intel’s growth in the tablet market and expands Rockchip’s product portfolio with the addition of the performance and flexibility of the Intel architecture and leading communications solutions. The new quad-core SoFIA 3G will be available in the first half of 2015, and Intel and Rockchip will sell the same into each others existing customer base (OEMs and ODMs).

While Intel has been the world’s dominant PC Microprocessor maker for over two decades, it has had difficulty penetrating newer processor markets for tablets and smartphones, in which Qualcomm (NASDAQ:QCOM) and Samsung (OTC:SSNLF, including Apple) are dominant. As a result, Intel’s growth has slowed significantly in the last two years, in line with declining PC shipments. Intel’s efforts to enter the handset advanced logic market with its Atom processor have failed to make a significant mark in the industry so far. However, it continues to focus on producing more energy efficient chips and adding features for connectivity and security to increase its share in the mobile computing space.

The Mobile & Communications segment accounts for less than 3% of Intel’s overall revenue and thus does not have a significant impact on its valuation, in our view. Moreover, the company continues to earn negative operating profit from the division and we believe it will continue to do so in the near future as well. Nevertheless, Intel’s investment and presence in the smartphone and tablet market is important for the company to retain its relevance and dominance in computing.

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In this article, we discuss how the agreement with Rockchip can help expand Intel’s presence in the tablet market.

See our complete analysis for Intel

Rising Demand For Low Cost Tablets In China To Drive Growth

While PC shipments have declined drastically in the last few years, mobile shipments (particularly smartphones and tablets) have grown at a robust rate. Tablet shipments grew from 72 million in 2010 to 217 million in 2013. Research firm IDC expects total tablet shipments to reach 271 million units in 2014 and reach 386 million units by 2017, surpassing PC shipments by the end of 2015. [1] [2]

While the Chinese smartphone market has been growing for a long time (China is the world’s largest smartphone market), the tablet market in the region hasn’t quite taken off yet. The Chinese tablet market (in terms of sales) is forecast to grow 50-60% in 2014, and is expected to continue expanding at a strong pace for the next few years. The rising demand for low-cost tablets made in China, by Chinese processor vendors such as Allwinner and Rockchip, is one of the key factors driving growth.

Intel recently increased its investment in China to accelerate the delivery of Intel technology-based devices, including two-in-ones, tablets, smartphones, wearables, and the Internet of Things among other technologies, to the China market and beyond. To leverage growth in China, the company plans to build upon its nearly 30-year history in the country, accelerating new innovations and reshaping the computing industry. (Read: Increasing Investment In China Can Help Expand Intel’s Mobile Presence)

The Rockchip Deal Will Expand Intel’s Presence In The Low-Cost Tablet Segment

Intel shipped 5 million tablets in Q1 2014 and targets to ship a total of 40 million tablets this year, compared to 10 million in 2013. An increased focus on the low-cost Android tablet space is a step ahead in meeting its goal, we believe. By expanding its reach in sockets that typically sell for $10-$20, the Rockchip deal will help Intel gain a considerable share in the Chinese market. [3]

Intel presently accounts for 4% – 5% of the global tablet market, and we believe that expanding its presence in China can help the company increase its share in the global tablet market. Allwinner and MediaTek are thriving in the low cost tablet market due to the absence of reliable and reputed high-performance competitors.

Intel introduced its SoFIA family of integrated mobile SoCs, which target the entry and value smartphones and tablets, late last year. With the Rockchip agreement, Intel’s SoFIA family now consists of three different offerings:  the dual-core 3G version expected to ship by the fourth quarter of this year, the quad-core 3G version that is expected to ship in the first half of 2015, and the LTE version, also due in the first half of next year.

If Intel meets its target of shipping 40 million tablet chips by the end of 2014, its market share would increase to approximately 15%.

Intel Believes That New Products Will Eliminate The Need To Offer Subsidies

Intel has offered to heavily subsidize manufacturers’ costs to include its components in their future tablets, a move that impacts Intel’s bottom line but could help it sell more chips. Intel is paying tablet makers to cover the additional component costs of using its Bay Trail chips instead of ARM-based processors, and is also helping its customers cover the engineering costs of designing an Intel tablet.

With contra revenue, Intel is paying tablet makers to cover the additional bill of materials (BOM) costs. However, the company believes that it will no longer have to pay the subsidies when its new products hit the market towards the end of 2014. The bill of materials cost for a Broxton tablet will be $20 less than for Bay Trail, and SoFIA with its greater integration and smaller die size, is expected to cost even less. [4]

Our current price of $27 for Intel is almost in line with the current market price. We are in the process of restructuring our model to incorporate the new reporting structure.

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Notes:
  1. Tablet Shipments Forecast to Top Total PC Shipments in the Fourth Quarter of 2013 and Annually by 2015, IDC Press Release, September 11, 2013 []
  2. Worldwide Tablet Shipments Forecast to Slow to Single-Digit Growth Rates by 2017, IDC Press Release, December 3, 2013 []
  3. Intel – Rockchip Deal Could Mean A New Player In x86 And Transform Intel’s Mobile Division, Hot Hardware, May 30, 2014 []
  4. How Intel is buying, building a piece of the tablet market, PC World, January 18, 2014 []