With the market for PCs in decline, Intel (NASDAQ: INTC) has been working to broaden its business in recent years. The company has managed to essentially run away with the server chip market, relegating rival Advanced Micro Devices to the sidelines, and it has aggressively pushed into the mobile market, not afraid to lose money along the way. As Intel becomes less dependent on PCs, let's take a look at three key numbers that all Intel investors need to know.
The rapid rise of smartphones and tablets seemed to catch Intel by surprise. The company's PC chips offered great performance, but mobile devices require power efficiency that Intel's products had a tough time providing. Chips based on the ARM architecture became the standard for mobile devices running Android and iOS, and Intel was left out in the cold.
The company took dramatic action to rectify this situation. Its Atom processors, originally used in netbooks, were repurposed for mobile devices, and Intel worked to make the chips as efficient as possible. In order to gain tablet market share quickly, the company began subsidizing its tablet chips, essentially paying manufacturers to use its Atom processors. Intel set an ambitious goal of shipping 40 million tablet chips during 2014, and it managed to surpass that goal, claiming a significant percentage of the global tablet chip market.
This entry into the tablet market proved expensive for Intel. In 2014, Intel's Mobile and Communications group recorded just $202 million in revenue thanks to those tablet subsidy payments, posting an operating loss of $4.2 billion. As Intel's mobile chips become more competitive, these subsidy payments should decline over time. But with far more competition in the mobile market compared to the PC market, mobile devices are unlikely to become a major cash cow for the company any time soon.
One of Intel's key growth businesses over the past few years has been its data center segment. The company holds a dominant position in the server chip market, and this has allowed Intel to reap seemingly outrageous profits. During 2014, Intel's data center segment reported $7.28 billion of operating income on $14.39 billion of revenue, good for an operating margin of 50.6%.
The growth of giant data centers to support cloud computing has been a major driver behind Intel's most profitable segment. At the moment, Intel faces no real competition, as AMD's products are largely uncompetitive, ARM server chips have yet to gain any real foothold, and IBM's expensive Power systems continue to lose share. However, the competitive landscape is changing, and Intel's enormous margins may be at risk.
AMD plans to launch new server chips based on its upcoming Zen processors next year, and with the company newly focused on the high-end segment, there's a decent chance that AMD's chips could eventually steal away at least some market share from Intel. Meanwhile, IBM has opened up its Power architecture through the OpenPOWER foundation, and with less expensive third-party Power systems on the way, Intel faces a second threat at the high end of the market. Lastly, ARM servers pose a longer-term threat, with the potential to disrupt the low-end of the server chip market.
While Intel enjoys extremely high margins in its data center segment today, profitability could hit its peak in the coming years.
One of Intel's key advantages is its cutting-edge foundry. While Intel manufactures nearly all of its own chips, most of its competitors rely on third-party foundries. Intel was the first company to bring chips based on a 14nm manufacturing process to market, and by continuing to make huge investments, Intel aims to retain its lead in manufacturing.
As transistors get smaller, transistor counts rise along with power efficiency, leading to more powerful, more efficient chips. Intel's Core M chips, built on the company's 14nm process, allows for extremely thin, fan-less PC designs, like Apple's latest MacBook. In the mobile segment, where power efficiency is extremely important, smaller transistors allow for improvements in battery life. And in the data center segment, more efficient chips mean a lower total cost of ownership for Intel's customers.
Intel is now working on the next step forward, shrinking transistors down to 10nm. Intel had quite a bit of trouble with its 14nm products, leading to delays, so the launch of 10nm products may still be a long ways off. But the key for Intel is maintaining its advantage over its competitors, and for now, it appears unlikely that Intel will lose its manufacturing lead any time soon.
The next billion-dollar Apple secret
Apple forgot to show you something at its recent event, but a few Wall Street analysts didn't miss a beat: There's a small company that's powering Apple's brand-new gadgets and the coming revolution in technology. And its stock price has nearly unlimited room to run for early-in-the-know investors! To be one of them, just click here.
Timothy Green owns shares of International Business Machines.