Financial investment Thesis
The bearish article I reacted to sees profits decreases looming for Intel due to losing Apple as a consumer. Here, I presented a different view of these occasions. While, certainly, this presents a headwind to Intels earnings over the next few years, people have currently approximated the size of this headwind at about $5 billion. This is a recognized amount. And while it is a significant business that will disappear (for example, bigger than Intels present IoT company even after a decade of constructing out), it is best to see this as a one-time effect.
Summarizing, as its 23% Q1 earnings growth and ~ 8% 3-year CAGR program, gains are progressively and definitely amassing, while Intel is purchasing the next huge development drivers such as Mobileye and discrete GPUs. None of these financial investments and development chances are impacted by the Apple changes (aside potentially from losing out on offering discrete graphics items for future Macs).
Dangers.
The easiest rebuttal to the Apple items is that they are one-time occasions. To utilize an analogy from mathematics: if you have a function like y= 72 +5 x, then this might represent Intels 2019 profits and yearly growth rate. Considered that the Apple event gets rid of $5 billion in income, the new function may appear like y= 67 +5 x. What this analogy conveys is that while the base earnings may decrease, the growth (the slope of the function) stays the same. In this example, if Intel includes $5 billion every year in revenue, then it will have made up for the Apple loss in one year. (And Apple said the transition would take 2 years, making it possible that Intels earnings will merely decrease instead of decrease.).
Taking a look at Intels latest (Q1) profits further shows this. I will utilize its latest report to information where its growth is coming from.
In this view, taking a non-growing piece (whether it is $5 billion or previously the $2 billion McAfee hit) out of a development company should not worry the long-term financier much.
It does not change any of Intels genuine growth drivers, whether it is the cloud, networking as it relocates to 5G, IoT (which should be able to reach the $2 billion quarter mark quicker than the very first $1 billion quarter, due to the laws of intensifying), 3D NAND, Mobileye or FPGAs. As discussed, these segments are all growing, COVID-19 concerns regardless of. Or whether it worries Intels upcoming development drivers such as silicon photonics, Optane relentless memory, Mobileyes financial investments in self-governing cars, robotaxis and sensing units, or discrete GPUs.
In that sense, these 2 headwinds, while the significance of the size of the losses may be up for argument, I would argue they might be best compared to the 2017 McAfee spin-off: a one-time revenue impact. McAfee impacted Intel income by $2 billion (similar to or simply below the size of the modem service). It has actually not stopped Intel from growing at an 8% 3-year CAGR in spite of that headwind.
About the losses.
Intel itself sees a $300 billion TAM it is pursuing and has guided to $85 billion in revenue by 2022-2023. That guidance was available in May last year, after the modem exit, and by that time Intel was likely currently aware (even if just by means of the rumors) of Apples Mac advancements. Such guidance in spite of these headwinds suggests that Intel management is about as bullish about the service as any financier (and this short article).
Intels 3D NAND group, Intels the majority of cyclical business, saw a strong 46% growth to $1.3 billion. Intels FPGA group also saw a modest 7% growth to $0.52 billion.
Finally, besides these core (no pun meant) and mainly CPU companies, Intel likewise has some surrounding companies. I kept in mind in a previous short article that Intels adjacencies altogether are currently the size of Nvidia, and growing about as fast, even if they are separately rather small.
Looking for Alpha just recently published another short article, coming at it from a slightly various angle, claiming that Arm will result in more market share losses for Intel. Because case, the disappearing Apple company might have cascading effects, which could result in more (indirect) losses that the one-time effect I represented the Apple event as.
When leaving out the Apple organization, posting $72 billion in revenue in 2019 surely looks better than $67 billion. (With the McAfee company, it would have been $74 billion.) But as I argued, Apple is a $5 billion business to Intel without development. It does not affect the areas where Intels genuine growth originates from. If one accepts that Intel is a growth business, then this should not truly alter its long-lasting outlook or appraisal. To that end, I already kept in mind Intels ~ 8% 3-year CAGR (in spite of the McAfee spin-off) as a sign that Intel is certainly a development company.
While this covers all of Intels sectors, there is more to it than Intel reports. In my first Seeking Alpha publication in January, I kept in mind that Intels chance in AI is one of its essential growth drivers, with a market chance that might be worth tens of billions of dollars over the next five to 10 years.
As a more concrete recommendation, and pertinent in the existing times, Intel has talked about a few of its efforts and contributions versus COVID-19. Maybe a healthcare-related acquisition such as Livongo Health (LVGO) could be a separated addition to Intels portfolio. While far from Intels core service, it might broaden Intels IoT business and would probably fit my view of Intel as a data-centric conglomerate. I have also previously suggested that Intel could acquire NIO (NIO). Third, perhaps Intel might acquire a cloud company and start its own cloud service to contend versus the similarity Amazon (NASDAQ: AMZN), Microsoft (MSFT) and Google (GOOG) (NASDAQ: GOOG). This isnt unreasonable, considered that Amazon is now doing the reverse (taking on its supplier Intel) by establishing its own Graviton chips.
Whilst I tried to show that Intel is a development business, the ramification of this statement is that a short article with the title Intel: Losses Are Mounting, if it would then provide a case (if it is substantiated) of how AMD is consuming into Intels PC and information center market share, may present a lot more persuading argument versus my bullish thesis, as AMD might lower Intels (long-lasting) growth rate: while the Apple organization is simply one that will disappear, if AMD includes $10 billion in income, then this is $10 billion in profits that simply as well could have been made by Intel. From that angle, Intel requires to develop the worlds best silicon and options to complete against competitors such as AMD and others. If it does that, then it can reasonably benefit from the growing market patterns such as cloud computing and others, rather of letting others take that profits. Or as in Apples case, convince others that they do not need to develop their own silicon.
Secondly, I noted “if one accepts that Intel is a growth business, then this must not actually alter its long-lasting outlook or assessment.”.
So I do not foresee the Apple saga as being more than a blip in Intels long-lasting growth story. It will certainly drag down Intels growth in the coming two years while the shift unfolds: Intel likely will not provide development numbers in its incomes where it leaves out the Apple service (” x% growth YoY without the Apple company”), as it offered during the McAfee shift. For simpleness, it essentially comes down to a $5 billion one-time impact, per my mathematics analogy above.
While Intels data center organization is quite cyclical, the overall trend is up to the right, at low- to mid-teens traditionally. The development drivers of this segment are the cloud and Intels networking service. The general networking market is worth over $20 billion today, of which Intel has about $5 billion – I remember Seeking Alpha articles back in 2013 about how networking was one of the major growth opportunities to grow data center profits.
As an idea experiment, lets state Apple had actually kept Intel as supplier of both its Mac chips and cellular modems and lets state this is a $5 billion business. How much would this company create long-lasting, lets state in 2030? I personally do not see Mac or iPhone units growing a lot over the coming decade. (The just caution to this is that if Intel, for instance, had actually maintained its procedure innovation lead it had till 14nm, the situation might have been reversed, with the iPhone transitioning to either Intel x86 chips, or more most likely, Apple switching from TSMC (TSM) as foundry to Intel Custom Foundry. Either way, in that scenario, Intel may undoubtedly have actually continued to expand its business with Apple instead of losing it.).
Replacing the Apple company.
Interestingly, the McAfee spin-off came at around the same time as Intels 2015-2016 acquisition of Altera (for FPGAs). Both produced around $2 billion in revenue, so because sense the Altera company has actually essentially changed McAfee (although the acquisition occurred prior to the spin-off).
To that end, Intels Apple organization represents $5 billion in nice-to-have earnings and associated earnings (and Intel had easily confessed the modem business was below business gross margin anyhow), however not a core growth motorist.
Q1 is usually Intels weakest quarter, but these solid outcomes were due to numerous tailwinds. As I wrote at the time, COVID-19 caused an increase in need for PCs (and information centers), and thirdly, Intel was able to recognize some additional earnings as it finally caught up to its 18-month scarcity coming out of Q4. This is most likely to continue into Q2 to some degree as Intel stated it would develop up stock to historical levels.
While it is undeniably true that these two items, the Apple modem and PC business, will have to do with a $5 billion headwind, it will be, when all is done, a one-time impact. Intel was not acquiring extra modem clients (although 5G modems may have seen an uptick in rates), and neither would Apples MacBook line add to additional long-lasting growth (in case Apple did not make the switch to utilizing repurposed iPhone chips in its macs). To that end, Intels Apple business represents $5 billion in nice-to-have income and associated revenues (and Intel had actually readily confessed the modem company was listed below corporate gross margin anyhow), but not a core growth motorist.
Intel is investing in some huge bets that are not yet providing much earnings today, but which might become Intels next $5 billion (” Apple”) business. While Mobileye is the tiniest segment Intel reports, it has the biggest chance. Intel itself talks about a 2030 TAM of tens of billions of dollars (jointly) for ADAS, self-governing vehicle calculate silicon, and lidar/radar sensors, and a robotaxi opportunity of well over $100 billion.
Because long-lasting worth most frequently originates from (expected) future returns, I argue investors need to look at the slope of the curve, not its base value.
Disclosure: I am/we are long NIO. I wrote this short article myself, and it expresses my own viewpoints. I am not receiving compensation for it (other than from Seeking Alpha). I have no service relationship with any company whose stock is mentioned in this short article.
Growth and Gains.
Takeaway.
One answer may be that Intel has already done so: Mobileye. This is approximately in accordance with the timeline of Apples transition from Intel, so in that sense Mobileye might indeed have completely replaced Apple by the time it is offering its last Macs and iPhones with Intel silicon.
I have sent a separate piece to Seeking Alpha with my analysis and take on the Arm vs. x86 debate, so do not hesitate to keep an eye out for that. Its conclusion is that I dont see a fundamental benefit in the Arm architecture, and I see the Apple shift more as in line with the businesss basic efforts to bring its silicon engineering in-house and merge its software application community, as it has made with its iPhone SoCs (consisting of the CPU, GPU and in the future its 5G modem). In the PC space, I dont see such a trend occurring with the conventional Windows OEMs, for comparable factors that business (significantly) use the services of SaaS business instead of establishing their own software. Rather, QUALCOMM (QCOM) will be a rival to Intel similar to AMD. Furthermore, the PC isnt really a growth driver for Intel anyway (aside from its new discrete graphics company).
Basically, this post is a defense of a current, bearish Seeking Alpha article about Intels (INTC) losses– as such, this is a bullish short article. Its thesis, as the article went, is that Intel losing the Apple (AAPL) iPhone modem business, in addition to Apples MacBook CPU service, would swing it from income and earnings growth, to decline.
So by all methods, gains in the data center are amassing in the short-term, while the long-term development patterns of cloud and 5G obviously also remain undamaged, including the chance to take a great deal of market share in networking.
(The just caution to this is that if Intel, for example, had actually kept its procedure innovation lead it had up until 14nm, the scenario might have been reversed, with the iPhone transitioning to either Intel x86 chips, or more likely, Apple switching from TSMC (TSM) as foundry to Intel Custom Foundry. Intels 3D NAND group, Intels most cyclical service, saw a strong 46% development to $1.3 billion. While far from Intels core business, it may expand Intels IoT business and would most likely fit my view of Intel as a data-centric corporation. Whilst I tried to show that Intel is a development business, the ramification of this statement is that a short article with the title Intel: Losses Are Mounting, if it would then present a case (if it is corroborated) of how AMD is eating into Intels PC and information center market share, may provide a much more convincing argument against my bullish thesis, as AMD might lower Intels (long-lasting) development rate: while the Apple service is simply one that will disappear, if AMD includes $10 billion in revenue, then this is $10 billion in income that simply as well might have been earned by Intel.
