From 1990 to 1999, Intel Corp. (Nasdaq: INTC) shares soared 10,000%, making the chipmaking half of the so-called "Wintel" duo a stock that almost every investor wanted to own.
And why not: Intel's processors served as the brains of 90% of the world's personal computers. And the PC market was booming.
It's been a much different story over the last 10 years, however.
The once-scorching PC market has seen its growth slow, and Intel's stock has gone from heavyweight leader to disappointing laggard: From 2001 to this year, while the Nasdaq Composite Index has gained 34%, Intel shares have actually skidded 15%.
As bad as that performance has been, Intel's stock-price woes are actually just a symptom of a deeply troubling malady - not the malady itself. Intel remains tops when it comes to desktop PCs or laptop computers, but that's not where the market is now headed. Mobile-computing - you might refer to it as smartphones, iPads and "tablets" - is where the growth is.
"Intel has [completely] missed the transition to a post-PC era," Auguste Richard, an analyst for Piper Jaffray Cos. (NYSE: PJC), wrote in a recent research note.
And this "transition" is turning into an outright seismic shift.
Missing the Move to Mobile Computing
In the first quarter of this year, PC sales actually decreased on a year-over-year basis: Research firm Gartner Inc. (NYSE: IT) reported a 1.1% decline, while IDC Research Inc. pegged that decline at 3.2%.
What's more, consulting firm Deloitte LLP has projected that 2011 will be the first year that the combined sales of tablets and smartphones will exceed those of laptops, netbooks and desktops.
That doesn't bode well for Intel.
With just 14% of the mobile processor market - compared to the 80% share it currently has for the central-processing-unit (CPU) chips that power the world's PCs - Intel could eventually lose its crown as the world's dominant maker of CPUs.
"Intel has no market share in the next wave of computing," Richard, the Piper Jaffray analyst, wrote in his recent report. "Smartphones and tablets are where the innovation and excitement are being created."
With its core market of PC processors beginning to weaken, Intel needs to find a way to win a bigger slice of the growing mobile market - or onetime leader Intel will be doomed to remain a laggard.
This is one tough assignment. Makers of tablets and smartphones have shunned Intel's mobile offering, the Atom, in favor of chips using technology licensed from ARM Holdings PLC (Nasdaq ADR: ARMH), and for one simple reason: ARM chips consume less power - the most important attribute for a mobile chip because it extends battery life.
In fact, ARM is quickly becoming to the mobile-device market that Intel had been to the PC market: Right now about 75% of mobile devices use ARM chips.
According to Piper Jaffray's Richard, Intel's historic emphasis on more powerful chips at the expense of efficiency, as well as "inertia" due to efforts to support its legacy PC market, have hampered its ability to satisfy the needs of mobile-device makers.
And though ARM is the market-share leader, today's mobile market is much more complicated than its PC-only predecessor of a decade or so ago - which is why Intel now finds itself fighting a multi-headed beast.
Mobile Computing and the Multi-Headed Beast
What ARM has done is to pursue more of an "open" arrangement with its market-leading technology; it licenses its technology to other companies, which can then custom-design chips for their own specific purposes.
That's changed the competitive landscape for Intel, and in a big way. For years, Intel only had to joust with a single market rival, namely the much-smaller Advanced Micro Devices Inc. (NYSE: AMD).
But now Intel finds itself having to brawl with some of the biggest names in the global-high-tech sector, including Apple Inc. (Nasdaq: AAPL), Samsung Electronics LTD (PINK: SSNLF), NVIDIA Corp. (Nasdaq: NVDA) and Qualcomm Inc. (Nasdaq: QCOM).
And it's not just the players who have multiplied. Intel must also find ways to become relevant, despite having to develop competitive responses to a now-bewildering array of business models.
Some of ARM's customers only design the chips. That's what Apple does with the A4 and A5 processors used in the iPhone and iPad. Others, such as Qualcomm, just manufacture them.
That dynamic ecosystem, with companies designing chips to suit an individual product, contrasts sharply with the longstanding - and largely monopolistic - Intel-centric approach in which Intel forced buyers to choose the chips they wanted to use from its sent product line.
"The reason why ARM is going to kill the microprocessor is not because Intel will not eventually produce an Atom that might be as good as an ARM, but because Intel has the wrong business model," Dr. Hermann Hauser, a co-founder of ARM, told The Wall Street Journal. "People in the mobile phone architecture do not buy microprocessors... They license them. So it's not Intel vs. ARM, it is Intel vs. every single semiconductor company in the world."
To add insult to injury, Microsoft Corp. (Nasdaq: MSFT) announced earlier this year that the next version of Windows will support ARM. Such a move would threaten Intel's traditional PC chip business - and would perhaps represent a formal end to the "Wintel" (Microsoft Windows and Intel CPU) duopoly that served both companies so well for so many years.
(There's even some market scuttlebutt that Microsoft - now free [as of May 12] of the decade-old U.S. Justice Department consent decree - should consider buying ARM outright, a move that would place it in the center of the mobile-device market.)
No Retreat, No Surrender
Intel isn't waving the white flag just yet. Indeed, the company has launched a counterattack strategy, though it will be some time before investors will know whether this complex plan will bear fruit.
Intel has invested billions of dollars in several technical innovations, including its 22-nanometer fabrication process (the current standard is 32 nanometer - the smaller number means the components can fit closer together, increasing efficiency) and especially in its breakthrough "Tri-Gate" method of building transistors in three dimensions, instead of on a flat plane.
These new technologies and production methods will yield several important benefits - especially when combined. The biggest of all will be a 50% reduction in the power consumption of its chips.
That should help win over some mobile-device makers.
"Marching down the nanometer curve will definitely help Intel to penetrate the market for mobile devices," said Francis Sideco, principal analyst for wireless communications at researcher IHS Inc. (NYSE: IHS). "That, however, is only one part of the equation, as power efficiency in these types of devices also requires system-level optimization of the processors."
Most ARM chips incorporate the "optimization" to which Sideco refers.
Still, Intel's new technology does give it an edge and time to exploit it; such rival chipmakers as International Business Machines Corp. (NYSE: IBM) and Taiwan Semiconductor Mfg. Co. Ltd. (NYSE ADR: TSM) are believed to be at least a year behind.
"When it comes to the mobile market, they have their work cut out for them," Dan Hutcheson, a CEO of VLSI Research Inc., told USA Today. But "this gives you the transistors to build the next great system."
If You Can't Beat ‘Em...
As a hedging move, Intel is itself becoming a maker of ARM chips; it bought the expertise with two acquisitions: Wind River in 2009 and Infineon's wireless solution division in January.
While Intel doesn't make as much money fabricating ARM chips as it does by selling its own designs, it's better than losing the business altogether.
And earlier this month, Richard, the Piper Jaffray analyst, reported that Intel is actively seeking Apple's A4 and A5 foundry business.
"It makes strategic sense for both companies," Richard wrote in a report. "The combination of Apple's growing demand and market share in smart phones and tablets gives Intel a position in these markets and drives the logic volume Intel needs to stay ahead in manufacturing."
If Intel succeeds, it would gain a prominent chunk of the mobile segment as a fabricator.
Telling Intel's Fortune
But the question remains: Can all these moves create enough real growth to rejuvenate Intel's share price?
Because of its past successes, Intel pulls in $12 billion in revenue each quarter. Even without the rising competitive pressures, this fact alone makes meaningful growth very hard to achieve.
Intel stock had been down about 6% year-to-date before the pop from its first-quarter earnings put it up about 10%.
Just last week Intel's top management reflected internal concern over its stock by increasing its dividend 16%, from 18.1 cents per share to 21 cents.
It's the second dividend increase in six months, and follows $5.5 billion in stock buybacks in the past two quarters - two moves that are clearly the sign of a company trying to placate increasingly impatient shareholders.
Some analysts see the dividend hike as a temporary fix.
"For me, the key concerns are a lack of success in mobile and potential loss of share in their core PC business," Roth Capital Partners LLC analyst Arnab Chanda told Reuters. "Increasing the dividend doesn't really change any of those things."
And none of this happens in a vacuum. Even as Intel looks to push its way into the mobile-computing market, its core business may find itself under assault - and from one of its mobile-computing rivals, no less.
ARM has apparently set its sights on the market for servers, the powerful computers used to run networks. Intel has been publicly dismissive of ARM strategy - although some analysts say the fact that Intel took the time to make such derisive comments is a sign that company leaders are worried that ARM might succeed.
The series consisted of an overview story, followed by an in-depth analysis of each company. The Intel analysis ran first, followed by Cisco and Microsoft. We intend to continue this as an occasional series going forward, adding updates on Intel, Cisco and Microsoft, and perhaps also looking at such other firms as Nokia Corp. (NYSE ADR:NOK). As the series concluded, star hedge fund manager David Einhorn called CEO Steve Ballmer "the biggest overhang on Microsoft's stock" - and called for his head.
If you have comments on the series, or suggestions for additional "leaders to laggards" companies we should write about, please feel free to drop us a line at[email protected].]
News and Related Story Links:
- Money Morning "Leaders to Laggard" Series (Part I of IV):
"Where Money Goes to Die:" After a Decade in Decline, Can Microsoft, Intel And Cisco Pull off a Rebound?
- Money Morning:
Apple Inc.'s (Nasdaq: AAPL) "Thunderbolt" Could Ignite Intel Corp. (Nasdaq: INTC)
- EE Times:
Intel vying for Apple foundry business
- PC Pro UK:
Wintel: the end of an era?
For computer chip builders, only one way to go: Up
- Information Week:
Say Goodbye to Wintel?
- Investor Guide.com:
Intel Shatters Earnings Expectations but Doubts Linger
Intel's Ivy Bridge chip technology may drive mobile push.
- Information Week:
Microsoft Should Pursue an ARM Acquisition Next.
- The Register:
Otellini: ARM servers 'ain't gonna work.' Intel boss says ARM chips still in short britches.
- VLSI Research Inc.:
- Information Week:
PC Sales Tumble As Consumers, Workers Eye Tablets
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.