Intel Partnership With Tag Heuer Can Give It A Big Push In The IoT Space

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In an effort to fight back against the upcoming $17,000 Apple (NASDAQ:AAPL) smartwatch (announced recently), luxury Swiss watch brand Tag Heuer has partnered with Intel (NASDAQ:INTC) to launch a smartwatch version of its Carrera watch next autumn. Many analysts predict that Apple’s watch, to be priced between $349 and $17,000, will dent sales of luxury watch brands, such as Tag Heuer, Tissot and Omega. JPMorgan estimates that 33% of Swatch Group’s profit is exposed to Apple’s smartwatch threat. [1] Intel, Tag Heuer and Google (NASDAQ:GOOG) announced a partnership to launch the Swiss smartwatch, powered by Intel technology and Android Wear, at the world’s biggest watch fair (Baselworld) last week. The smartwatch version of Carrera will apparently offer many of the same functions as the Apple watch such as geolocation, distance walked and altitude.

Intel’s partnership with Tag Heuer can give the former a significant boost in the fast growing wearable tech market. Having missed out on the mobile revolution, the company is determined to be an early entrant in wearable technology. CCS Insights estimate wearable shipments to increase by 158% this year, reaching 75 million units. The company further forecasts that almost 350 million wearable devices will be used worldwide by 2018, with smartwatches and fitness trackers being the most popular devices. [2]

In addition to introducing new platforms to accelerate PC demand, Intel has launched a number products and initiatives in the past year with different fashion, fitness and lifestyle brands, to accelerate its presence in wearables. These include the acquisition of Basis Science, the partnership with renowned rapper 50 Cent to create fitness-tracking headphones, the collaboration with Opening Ceremony to launch a fashion accessory MICA, as well as the partnership with Fossil and Luxottica.

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Unlike smartphones and tablets, luxury smartwatches will not require contra revenue. The very high operating margin on a TAG Heuer Android smart watch means Intel could easily charge $25-to-$50/unit for a souped-up version of its Intel Curie wearable computing chip. ((Intel Inside The Luxury TAG Heuer Android Smartwatch, Seeking Alpha, March 23, 2015)) For much of last year, the ramp up in Intel’s tablet volumes was offset by an increase in contra revenue dollars — hence the decline in its mobile revenues. With contra revenue, Intel has been paying tablet makers to cover the additional bill of materials (BOM) costs of switching from ARM-based processors. Intel’s mobile business reported an operating loss of $4.2 billion in 2014.

Tag Huer has a proven record of selling very expensive wristwatches and is a far more experienced vendor of luxury watches than Apple. ((Intel Inside The Luxury TAG Heuer Android Smartwatch, Seeking Alpha, March 23, 2015)) Tag Heuer is a subsidiary of the world’s foremost purveyor of luxury goods, LVMH. LVMH sells billions of dollars’ worth of male and female clothing and accessories, and Intel could gain even more by incorporating its technology in other LVMH products in the future.

Intel currently derives less than 10% of its valuation and approximately 5% of its revenue from the Internet-of-Things segment. We believe that accelerating its entry in wearables augurs well for Intel’s long term growth potential, and estimate the segment will account for approximately 10% of Intel’s total revenue by the end of our forecast period.

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

See our complete analysis for Intel

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Notes:
  1. LVMH’s Tag Heuer surfs wave of smartphone partnerships, Reuters, March 18, 2015 []
  2. Wearable Market: 2015 is Year That Will Make or Break the Smartwatch, CCS Insight, February 17, 2015 []