Intel, PCs, and Outcomes of Future Technology

On July 15, 2014, Intel [INTC] reported better than expected Q2 2014 earnings with the surprise coming from the PC Client Group (PCG) revenues, as a result of stronger than expected demand in PCs.  As expected, the Data Center Group and Internet of Things Group, a very strong quarterly revenues leading the company’s growth.

Intel Q2 earning summary:

  • Revenue of $13.8 billion.
  • Operating income of $3.8 billion.
  • Net income of $2.8 billion.
  • EPS of $0.55.
  • Cash from operations of approximately $5.5 billion.
  • Paid $1.1 billion in dividends.
  • Used $2.1 billion to repurchase 74 million shares of stock.
  • Gross margins of 64.5%.

Two things to note in Q2’s key business unit trends:
• PC Client Group revenue of $8.7 billion, up 9% sequentially (6% year-over-year).
• Mobile and Communications Group revenue of $51 million, down 67% sequentially and down 83% year-over-year.

Intel’s PC Client Group saw the third consecutive quarter of year-over-year unit growth.  In Q2, both the desktop platform revenue and the notebook platform revenue grew year-over-year.  The PC Client Group results include Desktops, Laptops, Chromebooks, 2-in-1 convertibles, Microsoft Surface, and detachables.

During the earnings call, Intel CEO, Brian M. Krzanich, stated that they were “seeing clear signs of a refresh in the enterprise, in small & medium businesses. While there are some signs of renewed consumer interest and activity, the consumer segment remains challenging, primarily in the emerging markets”.

Tablet volume was ahead of expectations, but the increase was offset with an increase in contra revenue dollars.  The company also saw a decline in their feature phone and 2G/3G business, due to industry transition to LTE solutions.

Read the full press release:
Read the full 10Q quarterly report:

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For the past few years IDC has been forecasting gloomy PC market data.  In early 2014 (March press release) it forecasted the total PCs shipped worldwide to be 291.7 million units in 2018.  In Q1 2014 (June press release) it reported worldwide PC volume declines as expected.




Investors, analysts, journalists, and the media, have been quick to jump on the IDC reports and other survey data.  With the addition of Microsoft’s initial struggle with both the Windows 8 OS and foray into mobile devices, they concluded that the end of the PC was near.  For the past few years we’ve been hearing statements like the “Death of the PC”, “End of the PC”,  and how “Tablets and smartphones will completely replace the PC market”.

Those making such statements point to the following issues:

  • The total market share of the PC platform is declining, being lost to mobile platforms.
  • The internet has made the desktop OS irrelevant.
  • PC’s flat and/or declining sales.
  • Rapidly increasing tablet sales per household.
  • Consumers are going to buy more tablets/phones and fewer PCs
  • The collapse of Microsoft and Intel
  • E-commerce traffic from mobile usage is increasing more than PCs.


 * * *


The issues they highlight are significant trends to consider.  Additional questions & information related to each issue that have been overlooked should also be considered, which help to assess the situation more objectively.  Ultimately this leads to better decision making and investment results.


The total market share of the PC platform is declining, being lost to mobile platforms:
• PC’s market share does not equate directly to the number of PC units shipped, since market share is a percentage of all combined units.  Are PC units going to be lost to mobile units, or is the market share reduction more of an effect from the addition of mobile platform units to the total personal computing market?
• Its likely a bit of both, but with the huge growth in the mobile platforms, the additional mobile units as part of the total market significantly impact the market share number.

The internet has made the desktop OS irrelevant:
• One feature of almost any OS and not just with desktop OS systems (but more so than mobile) is that they often do not require you to connect to the cloud or to work in a virtual workspace online.  MS office for the Mac or PC is still much more feature rich and powerful than on the cloud or on a mobile OS.  Excel is a great example, even though cloud computing has been around for a very long time.  Office Online has been around since 2010.
• There are many applications outside of everyday home consumer usage where the desktop OS is very relevant, such as in engineering/science (programming, electrical, mechanical, chemistry, biology, medicine), professional media (graphics, video, animation), etc.  Are these applications dismissible?  Can all the applications be replaced by equivalent applications on mobile platforms?  Is the real argument that cloud computing eliminates the need for local computing power?  When will the computing power of mobile platforms be able to handle these computation intensive applications?
• The internet alone may play less of a significance in the PC vs mobile platform debate, and it is just one aspect to consider.  Form factor perhaps, plays a larger significance (screen real estate vs portability, etc.).

PC’s flat and/or declining sales:
• The number of units shipped is relevant, but does flat or declining numbers mean the absolute end of a market segment?   200-300 million units is still sizable and profitable. What is the lowest number of units shipped that is economically sustainable?  Likely, this is a function of price as well.
• Related to this is the fact that mobile sales are greater and growing faster than PC sales. But all that tells us is that there is much more growth in the newer mobile segment.

Rapidly increasing tablet sales per household:
• Sample size matters. How many households?
• Geographic market matters.  Households in which countries? (likely in developed nations).
• Increasing tablet sales per household does not tell us whether tablets are replacing PCs, or just purchased as additional computing devices.  How many PCs are owned in those households already?
• This highlights only the consumer segment, ignoring the business/enterprise which makes up a significant portion of the market.  How likely/realistically are businesses going to swap PCs for tablets (cost, productivity)?

Consumers are going to buy more tablets/phones and fewer PCs:
• Its likely most consumers are going to buy tablets/phones in the next 6 months because they may not have a tablet, and want one.  Its also likely they already have a PC as well (work from home, watching video, school work, etc).  It’s likely this trend is higher for teens/kids than for adults, as tablets have a great form factor for entertainment.
• How likely is it that consumers who do not have PCs, will buy a tablet over a PC? How likely is it that a consumer will dispose of a PC in favor of a tablet?

The collapse of Microsoft and Intel:
• This “collapse” is based on the very large assumptions, that Microsoft and Intel will not innovate and come up with new products.  It assumes they will be unable to expand into the newer mobile segments.  It also assumes that in the absence of Microsoft and Intel, that no one else will make PCs.
• What about Apple (Mac/Macbook)?  Will Apple and AMD stop making PC chips?  Will ARM step in, if Intel disappears?  Will all OEM PC manufacturers stop making PCs?  Will Apple drop the desktop OS?  What about Linux?
• PCs are likely to still exist, even if in reduced numbers at first.  It’s possible that without Microsoft/Intel, there would be a spike in non-MS/Intel based PCs to capitalize on their absence.

E-commerce traffic from mobile usage is increasing more than PCs:
• This is true and a growing trend.  Does it mean that consumers will stop using PCs to shop online?  Its likely that if a consumer is using a PC for other purposes (work, entertainment, etc.) they will also surf the web on it and shop online as well for convenience (but perhaps to a lesser degree).


* * *


After thinking about the statements for a little bit, it is clear that there are far too many inconsistencies, counter examples, and questions, that make it extremely difficult to be able to simply conclude the death of the PC is imminent.  It’s also difficult to conclude the death of the PC even for the consumer segment.

The major flaw in the herd thinking, is that the mobile platform will completely replace the PC platform, due to the extremely large and rapid market growth for tablets/smartphones, in addition to the significantly large PC volume declines.   However, the use cases have been largely ignored, but are critical factors.

It’s likely that mobile platforms (due to its form factor) will be the primary platform of choice for consumers and perhaps even retail-oriented businesses.  What that might mean, is that the primary or first device used for most general applications will be a tablet/smartphone.  However, that doesn’t mean a PC will not be used or owned.  The application (use case) matters.  In other segments (business, industrial), it’s likely the PC will still be the primary platform and form factor of choice.  Again, It doesn’t mean that tablets or smartphones won’t be utilized either.

The IDC report for Q1 2014, also highlighted the following for PCs:
“Screen size of 21.x-inches wide has held the largest worldwide share for the last six quarters, with 20.5% share in 1Q14.”
• “Aspect ratio of 16:9 continues to dominate with 81.3% market share, which is 6.5 times the second most widely used Aspect ratio of 16:10.”

There are many applications/uses where it is more desirable to have larger screens sizes which are provided by PCs such as graphic arts, video, engineering, medical, science, personal entertainment, etc.

There are applications/uses where form factor, computing horsepower, lifecycle, cost, etc. matter as well, that may dictate which platform (PC or mobile) will dominate for those applications.

What the mobile platform did, was introduce choice where there was none previously, allowing for better matches for the intended use/application.


* * *


Intel is an investment in the company, and its ability to adapt new technologies as well as create them.  It’s n investment on their wide moat in manufacturing capabilities, R&D innovation, financial strength, and ability to eventually bring new technology products to market (from low end to leader type products).

These aspects are highlighted by strong Data Center Group and Internet of Things Group revenues, a wide range of solutions across multiple segments and applications,and the only company to ship out 14-nanometer products.  Intel has also gained significant and relatively quick market penetration in the lower end devices and emerging markets for the Mobile & Communications Group. But they still have a lot of work ahead of them.

Intel’s market share of the global tablets market is roughly 5%, while it’s share in smartphones has been less than 1%.  Keep in mind that both these numbers were zero a few years ago.  With its LTE solution now in use in key leadership products (Samsung, Asus), and next generation products shipping before the end of the year, we can see that Intel is closing the competitive gap between them and their peers, and with it, additional market share will be gained.  However, how much market share and how soon is uncertain.

I had initiated a position back in 2012 and added several times in the $25-$19 range , during the most pessimistic of times for Intel.  I wouldn’t say Intel is a buy now at this price, as much of the deep discount has disappeared.  Better value can be found elsewhere at these levels.


* * *


The big take away here is that while the broader technological trends are easy to predict, a specific outcome of technology is extremely difficult to foresee.

Take the example of the car.  The car did not completely replace the bicycle for personal transportation.  Yet, the car had all the “right elements”:

  • disruptive technology
  • highly desired
  • rapid growth in sales & volume
  • growing market share in personal transportation
  • can do many things that the bicycle could not

What ended up happening was that it replaced the bicycle in many applications where a bicycle was inferior in terms of distance, terrain, speed, comfort, carrying capacity, status symbol, etc.  But it also replaced the bicycle in many applications where the bicycle performed quite well, including short trips around the neighborhood, recreation & leisure, etc.

Presently, the global auto trend as reported by Scotiabank (Economics) in July 2014, saw 2013 total global car sales at 68.69 million units, and the 2014 forecast is expected to reach a record 71.99 million units.  In North America alone, it is forecasted that 2014 production will reach a record 17.10 mln units.  Yet the bicycle is alive and well.

The herd (investors, analysts, the media, and consumers) typically jumps on single pieces of information that are the most recent and vivid, and draw large & specific conclusions from it.  The tendency is to ignore a lot of other significant factors that make the outcome less certain.

Thinking more critically involves questioning the adequacy of the indicators used, looking for other factors that would affect the outcome, looking for dis-confirming evidence, as well as accepting levels of uncertainty. There is a lot of bias when such conclusions are made.  This not only applies to technology related investments, but all areas of investing.  I encourage all investors to develop and learning about mental models for decision making.  One of my favorite websites that I read regularly is Farnam Street. Farnam Street has a section dedicated to mental models, which is extremely useful for everyday life in general, but also for investors.

I’d love to see the sleek kind of Minority Report or Star Trek styled computing devices throughout our everyday lives.  But then again, we did see sit-down fixed-console computer stations (PC equivalents) in both those fictional worlds as well.



Thanks & Happy Investing! — The Investment Blogger © 2014

DISCLAIMER:  I own shares of INTC, and do not plan to add to my stake within the next 10 business days.


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