Intel Will Have to Prove Itself All Over Again in 2011
In 2009, Intel (INTC) tracked the robust rally of the Nasdaq, upon which it trades, rising 44% alongside the index's 48% gain. Higher prices for notebook and server chips helped increase revenues and operating margins alike.
This year hasn't been such a happy story. Intel is up just 2% for 2010, in contrast to the Nasdaq's 17% rise. There's a growing sense that the market will shrink for the notebook and desktop PC chips that produce three-quarters of Intel's overall revenue, thanks in large part to the rising ubiquity of smartphones and the sudden and largely unexpected success of tablets -- especially Apple's (AAPL) iPads.
The iPad, like the iPhone 4, uses a processor designed by Apple, based on an architecture from ARM Holdings (ARMH), and is manufactured by Samsung. The iPad's biggest competitor right now is the Samsung Galaxy Tab, which also uses the ARM design, essentially leaving Intel out of the tablet revolution, except as a bystander watching its impact on the netbook market.
Tablets won't kill off netbooks and other PCs any time soon, but they will dramatically slow their sales growth. Market research firm Gartner recently revised its projections for 2011's growth in PC shipments down to 15.9% from its previous estimate of 18.1%, based in part on the tablet and smartphone phenomena. Within three years, Gartner estimates, tablets could displace a tenth of PC sales.
Data Center Division Shows Strength
The story is similar with smartphones. Qualcomm (QCOM) makes 77% of chips in Android smartphones -- again, using ARM's architecture -- prompting one consulting firm to coin the term "Quandroid" to describe the Qualcomm-Android alliance. That term has to sting over at Intel headquarters, because it echoes the "Wintel" portmanteau long used to describe the Intel-Microsoft (MSFT) combo in desktops.
It all adds up to explain why Intel will see its revenue and profit growth slow dramatically next year. The world's biggest chipmaker is expected to report revenue growth of 24% in 2010, and its earnings per share should more than double to $1.99 from 77 cents in 2009. In 2011, however, revenue growth is forecast to slow to 4%, and EPS will fall by 4 cents a share to $1.95, according to a consensus of research analysts.
Intel's numbers receive some support from its data center division, which makes chips for servers, workstations and storage devices. The data center group accounts for about 20% of Intel's revenue, but half of its operating profit. And the division's revenue is growing faster: It increased 46% year-over-year in the most recent quarter, compared with an 18% growth rate for the PC client group.
Intel wants to see fast growth in its PC division growing again, and it knows the basic rule of survival for tech companies: When a core market slows down, innovate your way into new growth. That can be tricky, but few companies have mastered the process as well as Intel.
Atom and Sandy Bridge in the Spotlight
The company hopes to start off 2011 with some strong announcements at January's Consumer Electronics Show. CEO Paul Otellini said this month that 2011 will see more than 35 tablets released with Intel's Atom chips, with some debuting at CES. Later in the year, a third generation of smaller, more energy-efficient Atom processors will arrive for smartphones.
Intel introduced its Atom processor in 2008, which were popular in netbooks made by companies like HP (HPQ) and Asus, but mobile device manufacturers felt they weren't power-efficient enough for their portable gadgets.
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Otellini also predicts that Intel will make big strides in notebooks as well, thanks to a new chip architecture called Sandy Bridge. Like the Fusion chip from its rival AMD (AMD), Sandy Bridge will build graphics processing into its central processing units. Until now, computers using Intel CPUs have required separate graphics chips made by companies such as NVIDIA (NVDA).
Otellini compares Sandy Bridge to Pentium in terms of a step up in processing, saying it will change how computers handle video and allow developers to create new applications. But analysts so far seem unimpressed. JPMorgan Chase (JPM) declared that, notwithstanding Otellini's enthusiasm, Sandy Bridge appears to be "evolutionary, not revolutionary."
Whether it's evolution or a revolution, it will take months for Sandy Bridge to show whether it can make an impact on the PC market -- and on Intel's bottom line. However, one early encouraging indication is that Apple reportedly is interested in the new chips for its 13-inch Macbooks.
Intel's stock trades at 10 times its estimated earnings for this year, suggesting many investors share JPMorgan's lack of enthusiasm about the company's plans to revive growth. Otellini & Co. will have their work cut out for them to get investors to rethink their indifference toward Intel in 2011.
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