Wednesday, May 04, 2016

Intel Corporation: With Withdrawal From Mobile, Is INTC In Trouble?

Focusing on profitable areas makes sense, but might not be enough for INTC

The road to the mobile processor arena has been a constant uphill battle for Intel Corporation (INTC) since the company began that journey eight years ago with the introduction of its Atom architecture in 2008. That was two years after management “famously dismissed the opportunity to develop a processor for the iPhone, citing the low profit per handset and development costs.”

Unfortunately for INTC, by the time management made the decision to enter the smartphone processor market, it was too late.

In the years since, Intel has dumped billions of dollars into development, and while its silicon has indeed come a long way, the chips have failed to capture a significant portion of the mobile electronics market.

On the heels of mixed quarterly results last month, management announced a major restructuring plan that includes eliminating 11% of the company’s workforce — 12,000 employees worldwide by mid-2017 — and focusing the majority of efforts on its data center and Internet of Things businesses.

Last week, Intel CEO Brian Krzanich further clarified the changes that will take place and reiterated the company’s strategy for the future, which boils down to focusing on INTC’s most profitable segments and axing those that are not (namely, the SoFIA and Broxton products).

The obvious question, then, is what can INTC stock investors expect in the coming years now that Intel has exited the fastest-growing segment of the technology industry?

Is This the Proverbial Writing on the Wall?

I can’t help but wonder if the layoffs, the massive restructuring plans and Intel backing out of the mobile processor arena are harbingers of a weakening company.

Bowing out of the mobile space makes perfect sense, considering Intel spent in excess of $10 billion over the past three years attempting to make further inroads, yet failed at every turn. Management only reported figures for its mobile business for two years before merging it with its PC processor unit, and the losses for those two years exceeded $7 billion ($3.1 billion in 2013 and $4.2 billion in 2014).

Of course, a huge portion of that stemmed from Intel’s agreement to pay device OEMs to use its chips.

Still, INTC finished 2015 with less than 1% market share of the smartphone processor space. To put it another way, management couldn’t even bribe device manufacturers to use Intel chips.

So, throwing in the towel on an obviously unsuccessful endeavor is clearly a wise decision. It’s interesting, though, that one of the world’s top silicon developers has been unable to capture more than a microscopic portion of a $400 billion technology market.

Where might INTC stock be today if management had never attempted to enter the mobile processor market in the first place? All those billions of dollars could have been used to improve other areas and further development of profitable products.

Regardless, the focus for INTC stock investors now is the future, and without a spot in the mobile arena, how long might Intel hang on if “the PC business is still the bedrock that Intel is based on and currently determines how much of the company’s core IP and innovations evolve?” It’s no secret that the PC industry has been shrinking for a long time as tablets and smartphones have become the devices of choice. Intel scrapping its mobile products in favor of traditional PC chips is akin to remaining aboard a sinking ship.

Hints of turmoil within the company have also surfaced over the past month, contributing to concerns about the future of INTC. Last November, management announced the hiring of Murthy Renduchintala, who previously ran silicon operations at Qualcomm, Inc. (QCOM). Intel eventually disclosed Renduchintala’s compensation package, which exceeded $25 million.

Krzanich appointed Renduchintala as an executive vice president, and also head of a newly created division tasked with overseeing PC chips and any other device connected to the internet. Simply put, Renduchintala was put in charge of almost all Intel’s product businesses, making him second in command to Krzanich.

Bringing him in clearly rubbed some other INTC execs the wrong way. Within a few short months, the heads of Intel’s mobile unit and the PC unit resigned. The void left by these resignations isn’t one that’s easy to fill, especially considering that one of those former executives, Kirk Skaugen, was apparently favored to become the company’s next CEO.

Bottom Line for INTC Stock

In the short term, Intel will waste less money; the billions previously spent developing smartphone and tablet chips, and paying OEMs who used them, can be better allocated toward enhancing and refining Intel’s most profitable divisions. Together with the layoff of 12,000 employees around the globe, the cost savings is rather significant and has great potential.

In the long run, however, it’s hard to imagine that Intel will remain profitable and relevant forever, considering the company’s inability to capitalize even a little bit on the mobile device revolution. Competition in that space is as fierce as it gets, and by dropping out of the race entirely INTC will only fall behind even further than it already has.

With so much of Intel’s revenue and innovation dependent upon the deteriorating PC market, what will happen to INTC stock when that market shrinks to a point near irrelevance?

Hopefully, Krzanich’s plans to expand Intel’s IoT business will be more successful and eventually generate enough revenue to make up for the eventual extinction of the traditional PC processor space.

Article originally appeared on InvestorPlace (05/04/2016)

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