As PC era fades, good times may be over at Intel
Intel, the world's leading chipmaker, is used to being king of the personal computer market, particularly through its historic "Wintel" alliance with Microsoft Corp, which led to breathtakingly high profit margins and an 80 percent market share.business Updated: Oct 15, 2012 12:36 IST
As tablets and smartphones draw more and more users away from PCs, Intel Corp (INTC.O) is facing some difficult questions.
Intel, the world's leading chipmaker, is used to being king of the personal computer market, particularly through its historic "Wintel" alliance with Microsoft Corp (MSFT.O), which led to breathtakingly high profit margins and an 80 percent market share.
But in the fast-growing and cut-throat mobile world, Intel is struggling - its market share is less than 1 percent of smartphones, trailing Qualcomm Inc (QCOM.O), Samsung Electronics Co Ltd (005930.KS), ARM Holdings Plc (ARM.L) and others.
That leaves some investors, already concerned about a lackluster global economy, asking if Intel's invincibility has come to an end, and whether its profit and revenue growth potential may become much more ordinary.
When the company reports third-quarter results on Tuesday, one key figure to watch is gross margin, which analysts forecast at 62 percent. While that is still the envy of smaller chipmakers, it has been declining from a record 67.5 percent in late 2010, a trend analysts expect to continue.
"If we're moving to mobile, which is a low-margin business, it's difficult to see where the high-margin business is going to be for Intel," said Michael Yoshikami, chief executive of Destination Wealth Management. "That's why we own Qualcomm and we don't own Intel."
Shares of Intel have fallen about 7 percent over the past year. Qualcomm, a leader in providing "logic chips" or processors for tablets, has gained 12 percent.
It is not all gloom for Intel. Its highly profitable server chip business, now almost a quarter of revenue, is growing quickly as Internet companies like Google Inc (GOOG.O) and Amazon.com Inc (AMZN.O) build more "cloud" data centers to offer services to consumers using mobile gadgets.
Shipments of cloud servers are expected to grow at an average annual rate of 31 percent through 2015, much faster than overall server shipments, according to IHS iSuppli.
Pointing to an indirect benefit of mobile computing, Intel estimates that for every 600 new smartphones or 120 new tablets bought by consumers, an additional server is needed.
Still, the 44-year-old founding member of the Silicon Valley technology industry is struggling to find its place in a world moving quickly to mobile gadgets and social networks.
Analysts say emerging markets and business customers will fuel Intel's growth for the next several years but not at the explosive rates it has often enjoyed in the past.
Intel's revenue is forecast to be roughly flat this year with 2011 and to grow 4 percent next year, according to Wall Street estimates compiled by Thomson Reuters I/B/E/S. That compares with 24 percent annual growth in the past two years.
End of an era
Many technology pundits have declared the end of the PC era since Apple Inc's (AAPL.O) iPad hit the scene in 2010 and kick-started the market for touchscreen tablets.
Intel was slow to recognize how big a threat tablets would become, with executives describing them as complementary to PCs - a view shared by many others.
Increasingly, people are changing their tune. Global PC shipments are expected by analysts to decline slightly this year, the first annual drop since 2001.
To inject new life into PCs, Intel has been promoting a new category of thin, "Ultrabook" laptops with touch screens enabled by Microsoft Windows. But the Ultrabooks launched so far have been criticized as too expensive, and manufacturers have shipped fewer than expected. Intel declined to comment.
That shortfall was underscored when Intel warned in September of weak demand and cut its own forecast for third-quarter revenue by more than even the most pessimistic analysts expected.
The release of Intel's new Ivy Bridge processor this year was meant to speed up sales of Ultrabooks. But with premium-features like solid-state drives and touch displays, many models went for $1,000 or more - well above the $600-$700 price tag that analysts say is needed to gain traction with consumers.
Pointing to those high prices, IHS iSuppli recently slashed its forecast for 2012 shipments of Ultrabooks from 22 million units to 10.3 million units, with half of those expected in the next three months, coinciding with the launch of Windows 8.
"The only way it's going to work is if the PC world can achieve better economies of scale and get those prices down," said Longbow Research analyst Joanne Feeney.
Determined to protect its profit margins, Intel in the past has suggested it will not reduce chip prices to make Ultrabooks more affordable. Intel's dominance has long allowed it to charge aggressive prices for its processors - unlike many competitors, Intel both designs and manufacturers its own chips.
But even with that advantage, along with technological improvements and growing economies of scale, Intel may be hard pressed to preserve margins as it moves further into mobile, where processors sell for much less, analysts said.
Gross margins on smartphone processors typically work out to 50 percent, according to D.A. Davidson & Co analyst Aalok Shah.
"We believe the post-PC era has arrived," Piper Jaffray analyst Gus Richard wrote in a recent note to investors. "Moreover, $120 Intel CPUs are being replaced by $25 ARM-based CPUs as PCs are being cannibalized by tablets."
To be sure, many analysts say PC sales will pick up once the economy improves. Market research firm IDC said PC shipments fell 8.6 percent in the third quarter, but it expects annual growth in a range of 6.5 percent to 7.5 percent through 2016.
Microsoft also plans to launch a tablet/laptop hybrid using Intel's processors, aimed at corporate customers looking for a device compatible with business software that does not currently run on the iPad or Android tablets.
If nothing else, Intel's depressed share price has made investors like Capital Advisors fund manager Channing Smith take a closer look.
"Obviously the stock is extremely cheap and it has a very attractive dividend yield, but there's a good reason the stock is where it is, and that's mainly because strategically they've really missed out on mobile," Smith said.