Buy Intel While It's in the Penalty Box
01/04/2011 4:03 pm EST
The top chipmaker’s unjustly punished shares should leap as computing demand soars around the world, writes Paul McWilliams of Next Inning Technology Research.
Wall Street is continuing to underestimate Intel (Nasdaq: INTC). The company should benefit from the pent-up demand for computing power in emerging markets, yet is priced to trip over its shoelaces on the way to the party.
Economic mobility is driven by information and information management. There are approximately 5 billion cell phone users in the world today. In China, the number is approaching 900 million. In India there are nearly 700 million. To put this in perspective, only a decade or so ago, there were only about 1 billion cell phone users worldwide. The penetration of cell phones should be viewed as a proxy for the first wave of information technology—voice communicated information.
The next wave of the information age will be the spread of computing power. A decade ago, citizens in emerging markets went to a central place in their village or town and paid someone by the minute to use a cell phone. Today, more than 70% of the people in the world have their own cell phone. However, if they want to use a personal computer, the vast majority of these people still must visit an Internet Café. In other words, when it comes to the penetration of computing we are about a decade or so behind the penetration of cellular communication.
Computing Power to the People
As a matter of a fact, according to United Nations statistics, there are somewhere between 900 million and 1 billion PC users worldwide today. While I doubt that number will quintuple within 10 years, as it did for cell phones, I think it will at least double or triple. And when we begin to consider smartphones, tablets, and other forms of personal computing, a quintupling may not be out of the question.
There is monstrous pent up demand for low cost mobile computing. As the next generation of processor-based integrated circuits hits the street, this pent up demand will be released. In turn, the economies of scale for suppliers will improve and accelerate the next generation of products that will again lower price points and release more pent up demand.
It remains unclear which computing form-factors will prove the most successful in the decade ahead. Will cloud computing suck computing power from individual devices into large data centers where it can be more efficiently allocated? Will users find touch screens adequate replacements for keyboards? Will users be satisfied with small screen sizes like we see on smartphones? Will consumers still want desktop and notebook PCs? As I see it, the answer to all of these questions is a "qualified" Yes. There will be growing demand for all the traditional computing form-factors as well as demand for new form-factors.
A Processor in Every Pot
Computing power is coming to many things that had little or none of it before. This includes a wide variety of emerging "connected" home electronic devices, vehicles, medical instruments, and industrial equipment. What I'm talking about here is heavy-lifting computing where users have access to the computing power as opposed to simple processors used as controllers.
The bottom line is that demand for computing power will increase going forward. Not only will users demand more computing power in traditional computing devices, we will see increasing levels of computing power made available to many new markets.
Intel sells its processors for tens to literally hundreds of dollars and will generate revenue that will approach $44 billion this year. Who is better able to leverage processor demand?
Intel generally maintains a one-node advantage in semiconductor fabrication over its competition. That means it can squeeze twice as many transistors into a given area of silicon as its next closest competitor. It also means each of those transistors is a little bit less power hungry even though it runs a bit faster.
What Intel has lacked in the past was the need to optimize its architecture for absolute minimum power consumption and die size. The company took the first step towards this process with the introduction of its Atom processor, and is now taking another step with its Sandy Bridge platform. Intel will take yet another step later this year when it refines Sandy Bridge, and moves it to its industry leading 22-nanometer fabrication line.
One important thing to grasp about the emerging mobile computing market (smartphones, tablets, etc.) is the fact that the devices are continually increasing in their overall processing power and capabilities. In short, what we call smartphones today will be viewed as "dumbphones" within the next two years. This works to Intel's benefit. The company has a rich background in computing, which is a strength that I think is being overlooked.
[Jim Jubak recommended scooping up Intel shares when they briefly dipped below $19 in September (the stock traded well above $21 Tuesday.) At about the same time, James Stack called Intel one of the “forgotten giants” of the under-owned tech sector—Editor.]