If one goes back and reviews the presentations given to the investment community for the past three years, one will see that there is a constant theme that Intel’s growing process technology lead will eventually propel them to a leadership position in the PC and new Mobile world. It worked perfectly in the 1990s, however the center of gravity in computing architecture now is driven by the new ARM based ecosystems (iOS, Andorid etc.) and by the valuable baseband communications capability led by Qualcomm. Playing catch up is not what Intel is good at unless it is on the x86 architecture driven by the Microsoft Windows. The overwhelming success of Apple’s iPAD and Qualcomm’s 4G LTE silicon are the two significant high points of the year and yet imagine how much further ahead Qualcomm would be if they could have met the step function demand for their new chips.
Apple’s iPAD came into the world as an underpowered Internet screen and has been transformed this past year with the high-resolution screen and the new A6X processor into a mobile computing platform that can more than hold their own in the business world against x86 mobiles. Meanwhile the recently introduced iPAD Mini looks to be ready to cannibalize the sub $400 home PC markets. AMD felt the effect first and now it looks like Intel will take the all important step of breaking away from its reliance on x86 PCs and become a Foundry to the broader mobile computing world. I see it as a much better position than what Microsoft faces. Wintel is broken.
The transition that is about to occur for Intel may take place much faster than people believe. Looking back it now appears that a game of chicken was set in motion two years ago by Otellini, Bryant and the Board of Directors over the future of the company. If, Intel truly was going to be 4 years ahead of the industry by the time 14nm ramped then they should build a fab footprint that should serve the majority of the leading edge process silicon of the world. This meant doubling Intel’s wafer starts at a cost of $25B. Meanwhile Otellini had to execute on a plan to not just grow x86 mobiles but to win the smartphone and tablet market. On this score, Otellini was not able to execute fast enough or we can say the market outran him. Therefore, what is likely to happen is a retreat in the product development of x86 smartphone solutions, including baseband silicon to remove any competitive barriers to bringing Apple, Qualcomm and others on board.
There is no doubt in my mind that there have been foundry discussions between Intel and Apple, Qualcomm, Broadcom and even nVidia. My guess is that Bryant has led this side of the business while Otellini focused on Intel’s traditional business. Now that the PC market is shrinking, Intel is at 50% Fab utilization at 22nm and the company’s valuation has dropped to $100B, below that of Qualcomm, there was a need to change the business model. There is little time to waste for Intel to leverage its assets.
Apple is working on a transition plan to TSMC that is supposedly starting late next year in 20nm. Given their growth rate and the need to reduce geographic and Geopolitical Risk (EU, USA employment, antitrust and tariffs) it will be necessary to diversify their foundry business to worldwide locations. Only Intel can offer this to Apple with its fabs in the USA, Ireland and Israel. An Intel retreat on Atom and a friendlier wafer supply agreement should open the doors to an Apple partnership for leading edge capacity that heretofore was only given to x86 components. Apple’s A6 and A6X processors will now offer Intel better margins than consumer x86 processors – this is a first. Intel’s 14nm process will offer Apple, Qualcomm, Broadcom and the rest of the industry power and cost savings that are tremendous and as I expect will generate for Intel better margins than what TSMC receives.
Intel’s current market cap is roughly $100B. TSMC at 40% of Intel’s revenue is at an $80B market cap. If Intel were to split into three companies: Datacenter, x86 client and Foundry, then one could see a significant increase in valuation. The Datacenter business, if it was fabless and valued like F5 would be worth nearly $60B as both companies make roughly 80% Gross Margins. The Foundry business, if it were to win 50% of Apple’s and Qualcomm’s business could bring in $10B in a run rate revenue by end of 2013, offsetting much of the loss in the x86 client business. But that is just the beginning as companies like Apple ramp from 300MU to 1BU+ in the next few years.
Over the course of the next year Andy Bryant will have to fill 3 leading edge fabs as the ramp for 14nm starts. If he accomplishes that goal, look for a major consolidation in the semiconductor Foundry industry as the value shifts away from the old 350MU PC semiconductor supply chain to the 1BU+, extremely low power, leading-edge mobile semiconductor key components. As mentioned earlier this year when Qualcomm was overwhelmed with orders for its 4G LTE chips, we are now witnessing an industry that has an insatiable demand for leading edge process technology. Until now Intel was hamstrung from pursuing what is the future Billion Unit market, now it is in the hands of the manufacturing guys. The irony may be that Intel has come full circle.
Full Disclosure: I am Long AAPL, INTC, QCOM, ALTR