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Intel's Evolution to Wireless: First Quarter's Report Card

Saturday - 4/27/2013, 4:19pm  ET

There is little doubt that computer chip leader Intel needs to evolve. The recent news about PC sales falling 14%, the most in history, only confirms that it will need to gain a meaningful place in the mobile market. To advance toward this goal, progress in four key areas is critical. Here’s how I grade the company’s results for the latest quarter:

Market acceptance of new chips

The most important factor for a successful Intel evolution is acceptance of their new products. News that the company has begun shipping its next-generation “Haswell” chip to manufacturers is a good start. This chip is aimed at powering ultrabooks and part laptop - part tablet hybrid devices. Its selling point is that it adds power-saving technology, while delivering top performance similar to that from a full sized PC.

Early indications are the chip’s acceptance is pretty good. The company noted that increased demand has allowed them to increase production. There have also been reports that Haswell products such as a Google “Chromebook” and Dell Windows tablets may be in the works. Close ties are also anticipated between the chip and Windows Blue. Windows Blue is an expected update to Microsoft Windows 8 that hopes to deliver even greater power efficiency. The combination is hoped to help Intel chip devices further behave like a smartphone or tablet.

Grade: B

Continued product development

Intel must continue developing new mobile products to succeed. Its first entry, the "Clover Trail" Atom processor, achieved little popularity because of performance issues.

Now, Intel seems to be readying a far more competitive product. The upgrade, code-named “Avoton”, is based on new micro-architecture and is expected to offer improved battery life and performance. It is expected that Avoton will be in tablets to be released during this year’s holiday shopping season with the code-name "Bay Trail". A chip code-named "Merrifield" could appear in smartphones starting next year.

Bay Trail is specifically aimed at the low price-point end of the market and promises to deliver hybrids, tablets, and notebooks with all-day battery life at budget prices. The company believes it could significantly expand the volume of Intel chip-enabled devices, both for Windows 8 and alternative operating systems. Any advancement in this space would be an important coup for the firm.

Grade: B+

Transition of revenue

Intel will surely lose revenue as PC sales continue their decline, but as the company increases its market share in mobile, the net result should begin to balance over time.

Intel reported first-quarter total revenue of $12.6 billion, down 3% from the comparable prior year period. The drop was mainly due to PC Client Group revenue, mostly related to PC's, ultrabooks, and hybrids. The segment’s sales were $8 billion, down 6%. These kinds of declines are to be expected as the consumer PC is replaced by mobile devices, but the plan is that revenue will stabilize as mobile product sales increase via more attractive ultrabooks and hybrids.

The company’s best showing was in products mostly related to servers in the Data Center Group. This segment reported sales of $2.6 billion, up 7.5 % year-over-year. These gains are important as they help fund the company’s evolution. Intel’s most interesting business segment is the Other Architecture Group, which includes tablets and phone product. It reported a drop of 9% in sales from last year to $1 billion. The question going forward is what kind of traction can they get in this less powerful mobile product market.

Grade: C

Valuation and the competition

Intel needs to have an attractive valuation compared to its peers to be considered worth investing. That would indicate any potential gains in mobile have not yet been factored into the share price, and those successes could accrue to shareholders.

Based on current results, annualized expected sales are around $49 billion, with average cash earnings of $9.4 billion at a profit margin near 19%. Using cash earnings times a market capitalization multiplier calculation, Intel’s fair business value looks around $22 to $26 per share at a moderately discounted multiplier of 12x to 14x.

NVIDIA is a direct Intel competitor, offering graphics and processor chips in the PC and tablet market. It has achieved some recent successes. The company announced wins in three Windows RT mobile devices and a unique Android gaming device. They also launched an updated Tegra product, their premier system-on-a-chip processor for mobile devices.

Intel is looking to steal market share from companies like NVIDIA. These smaller firms with less entrenched bases may find it harder to deal with Intel’s economies of scale and historic reach into the equipment manufacturers.

NVIDIA currently trades at around a 14x multiplier, based on a market value of around $7.7 billion, revenue of $4.3 billion, average earnings of $516 million, and a profit margin of 12%.

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