Intel’s Expanding Presence In Mobile & IoT To Help Drive Future Growth

Intel (NASDAQ:INTC) reported a strong Q3 2014, setting new records for revenue and earnings per share (EPS). Tha company has performed well so far in 2014 backed by a stabilizing PC market and it’s widening reach in new growth markets. While Intel’s growth in Q3 2014 was mainly led by strong performance in the PC and the Data Center business, the company fared well in mobile and Internet-of-Things (IoT) segments as well, which promise to be an important part of its future growth strategy. The company plans on building on its success in the PC and Data Center segments to successfully pursue adjacent opportunities, across the breadth of emerging and established devices. (Read Our Earnings Article Here)

Intel reported 8.9% and 16.4% year-on-year growth in PCs and data centers, respectively. While the company continued to see growth in IoT, which grew 14.2%, its mobile revenue declined from $353 million in Q3 2013 to $1 million in Q3 2014. In this article, we discuss Intel’s performance and its growth opportunity in the mobile and I0T segments, which together account for approximately 10% of the company’s valuation.

Our current price of $34 for Intel is approximately 10% above the current market price.

See our complete analysis for Intel

Expanding Mobile Footprint; Contra Revenue To Decline In The Future

Despite significant decline in revenue and heavy operating losses from the segment (the mobile business reported an operating loss of $1.04 billion in Q3 2014), Intel’s mobile business is showing considerable momentum.

The ramp up in its tablet volumes is being offset by an increase in contra revenue dollars. With contra revenue, Intel is paying tablet makers to cover the additional bill of materials (BOM) costs. (Here’s an interesting article explaining why Intel’s contra revenue is a good long-term move for the company) Intel’s operating loss declined sequentially in Q3 2014, and the company promises a substantial improvement in mobile chip profitability next year as contra revenue payments decline. Intel 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. ^[1]  It thus will be governed by the timing of the launch and adoption of these new products.

Intel shipped approximately 15 million tablets in Q3 2014, which takes the total to 30 million so far this year. Its target for 2014 is to ship 40 million tablets, which the company believes it can easily meet. According to third part estimate, Intel is now worldwide the second largest tablet assesses and the largest among  merchant suppliers. ^[2] Intel’s partnership with Rockchip, a leading Chinese fabless semiconductor company and mobile-internet system on a chip (SoC) solution provider, can help expand its presence low-cost tablet offerings. (Read: Agreement With Rockchip To Help Intel Reach Its Target Of Shipping 40 Million Tablets In 2014)

At the Mobile World Congress in February this year, Intel introduced its next-generation LTE cellular modem and Atom chipsets for mobile devices – XMM 7260. The company claims that it is winning large designs in its LTE communication products. Samsung recently chose Intel’s 7260 LTE modem (Intel is one of the only two companies shipping the Cat 6 LTE modems at present) for Galaxy Alpha and Galaxy Note 4. Intel claims that it has several other design wins in the works.

Intel’s LTE technology, which was originally developed for phones is becoming increasingly valuable in tablets and even PCs, as wireless wide area network connectivity becomes increasingly common. Intel estimates the rate of baseband attached to tablets will roughly double and that of PCs will rise to over 15% by 2018. ^[2]

While Intel presently accounts for 4% – 5% of the global tablet market. Its share in smartphones is less than 1%. ^[3] We believe the above developments can help the company expand its footprint in both the markets in the future.

Increasing Focus To Leverage Growth In IoT

Intel is keen to become an early entrant in what is touted to the be next big wave in computing – the Internet of Things (IoT). IoT includes all the other computing devices apart from PCs, tablets and smartphones. Gartner estimates the market will grow almost 30 times, from an installed base of 0.9 billion in 2009 to 26 billion by 2020. It will result in $1.9 trillion in global economic value-add through sales into diverse end markets. ^[4]

In August 2014, Intel signed a definite agreement to acquire LSI’s Axxia networking business and related assets from Singapore-based Avago, a vendor of analog semiconductor devices, for $650 million in an all-cash deal. The deal can aid Intel’s foray into the IoT market and other emerging technologies. Additionally, Intel has been investing in a wide range of start-ups in the wearables space, and has also tied up with some fashion houses to market wearable gear as a fashion accessory rather than just a device that monitors your health (and more).

In Q2 2014, Intel unveiled the smart bracelet developed in collaboration with Opening Ceremony – MICA (My Intelligent Communication Accessory) – at the Opening Ceremony Spring/Summer 2015 fashion show. It also announced its collaboration with Fossil, which specializes in consumer lifestyle and fashion accessories, to develop innovative wearable technology for the fashion-conscious.

With the expanding growth opportunities in this segment and Intel’s focus on rapidly expanding its footprint in the market, we believe IoT’s contribution to the company’s total revenue can double over our review period. In its Q3 2014 earnings call, the company mentioned that its IoT business is ramping out its products and growing.

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1. How Intel is buying, building a piece of the tablet market, PC World, January 18, 2014 [↩]
2. Intel’s (INTC) CEO Brian Krzanich on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 14, 2014 [↩] [↩]
3. Intel’s Management Presents at Citi 2013 Global Technology Conference (Transcript), Seeking Alpha, September 4, 2013 [↩]
4. Gartner Says the Internet of Things Installed Base Will Grow to 26 Billion Units By 2020, Gartner Newsroom, December 12, 2013 [↩]