Intel Will Have to Prove Itself All Over Again in 2011In 2009, Intel (INTC) tracked the robust rally of the Nasdaq, upon which it trades, rising 44% alongside the index's 48% gain. Higher prices for notebook and server chips helped increase revenues and operating margins alike.

This year hasn't been such a happy story. Intel is up just 2% for 2010, in contrast to the Nasdaq's 17% rise. There's a growing sense that the market will shrink for the notebook and desktop PC chips that produce three-quarters of Intel's overall revenue, thanks in large part to the rising ubiquity of smartphones and the sudden and largely unexpected success of tablets -- especially Apple's (AAPL) iPads.

The iPad, like the iPhone 4, uses a processor designed by Apple, based on an architecture from ARM Holdings (ARMH), and is manufactured by Samsung. The iPad's biggest competitor right now is the Samsung Galaxy Tab, which also uses the ARM design, essentially leaving Intel out of the tablet revolution, except as a bystander watching its impact on the netbook market.

Tablets won't kill off netbooks and other PCs any time soon, but they will dramatically slow their sales growth. Market research firm Gartner recently revised its projections for 2011's growth in PC shipments down to 15.9% from its previous estimate of 18.1%, based in part on the tablet and smartphone phenomena. Within three years, Gartner estimates, tablets could displace a tenth of PC sales.

Data Center Division Shows Strength


The story is similar with smartphones. Qualcomm (QCOM) makes 77% of chips in Android smartphones -- again, using ARM's architecture -- prompting one consulting firm to coin the term "Quandroid" to describe the Qualcomm-Android alliance. That term has to sting over at Intel headquarters, because it echoes the "Wintel" portmanteau long used to describe the Intel-Microsoft (MSFT) combo in desktops.

It all adds up to explain why Intel will see its revenue and profit growth slow dramatically next year. The world's biggest chipmaker is expected to report revenue growth of 24% in 2010, and its earnings per share should more than double to $1.99 from 77 cents in 2009. In 2011, however, revenue growth is forecast to slow to 4%, and EPS will fall by 4 cents a share to $1.95, according to a consensus of research analysts.

Intel's numbers receive some support from its data center division, which makes chips for servers, workstations and storage devices. The data center group accounts for about 20% of Intel's revenue, but half of its operating profit. And the division's revenue is growing faster: It increased 46% year-over-year in the most recent quarter, compared with an 18% growth rate for the PC client group.

Intel wants to see fast growth in its PC division growing again, and it knows the basic rule of survival for tech companies: When a core market slows down, innovate your way into new growth. That can be tricky, but few companies have mastered the process as well as Intel.

Atom and Sandy Bridge in the Spotlight

The company hopes to start off 2011 with some strong announcements at January's Consumer Electronics Show. CEO Paul Otellini said this month that 2011 will see more than 35 tablets released with Intel's Atom chips, with some debuting at CES. Later in the year, a third generation of smaller, more energy-efficient Atom processors will arrive for smartphones.

Intel introduced its Atom processor in 2008, which were popular in netbooks made by companies like HP (HPQ) and Asus, but mobile device manufacturers felt they weren't power-efficient enough for their portable gadgets.
Otellini also predicts that Intel will make big strides in notebooks as well, thanks to a new chip architecture called Sandy Bridge. Like the Fusion chip from its rival AMD (AMD), Sandy Bridge will build graphics processing into its central processing units. Until now, computers using Intel CPUs have required separate graphics chips made by companies such as NVIDIA (NVDA).

Otellini compares Sandy Bridge to Pentium in terms of a step up in processing, saying it will change how computers handle video and allow developers to create new applications. But analysts so far seem unimpressed. JPMorgan Chase (JPM) declared that, notwithstanding Otellini's enthusiasm, Sandy Bridge appears to be "evolutionary, not revolutionary."

Whether it's evolution or a revolution, it will take months for Sandy Bridge to show whether it can make an impact on the PC market -- and on Intel's bottom line. However, one early encouraging indication is that Apple reportedly is interested in the new chips for its 13-inch Macbooks.

Intel's stock trades at 10 times its estimated earnings for this year, suggesting many investors share JPMorgan's lack of enthusiasm about the company's plans to revive growth. Otellini & Co. will have their work cut out for them to get investors to rethink their indifference toward Intel in 2011.

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Stelios

I bought Intel in July 1999 for $64.5 a share and it split two for one that is it cost me 32.1/8 a share. The stock never got back anywhere near this price and now languishes in the high teens and low 20s. They practically pay no interest, yet the Board members and various CEOs get the cream plus the whole milk and leave the stockholders the non fat milk. Every time I get to vote, I vote everyone out, yet they all remain the same as long as the Chairman awards these people and himself millions of shares, thus making it impossible for the regular stock holder to have any saying. What is the FCC doing. plus the fund managers that vote for these useless executives over and over?

December 29 2010 at 12:46 AM Report abuse +1 rate up rate down Reply
g3user1usa

Keep that Intel silicon on the desktop. For mobile, ARM processors are the way to go. Apple needs to start building some ARM notebooks or mini-desktops and they can say goodbye to those low-end Wintel PCs. Most consumers don't need 'em at all. They'll be happy to get rid of all those Windows virii and malware headaches.

December 29 2010 at 12:37 AM Report abuse +1 rate up rate down Reply
MSmailbox

Yes, Intel has good plans. I base this on a fairly-recent acquisition. Of course, I'm looking at this from the outside, but it jives with some long-term predictions, that I made in the late-eighties. I'm not going to put myself out on a limb, publically, but I have comitted a sizeable portion of my investment portfolio, to Intel stock. Those who feel that Intel must become overly-reponsive to near-term developments, I believe have missed some of the long-needed changes, which other chip companies haven't prepared for, to my knowledge. Only time will tell, but it will be a very welcome advent, for x86 users, even if it doesn't create a windfall profit, in the short-term. I'm in this game for the long-run, not the "Sprint."

December 28 2010 at 6:16 PM Report abuse rate up rate down Reply
skullcrusherst

what a tired played out joke this really is and all the sleepers sleep away santa isn't real superman isn't and the stock market isn't real dont get me wrong it's there it just isn't real it's a place for fools to get played and robbed of hard earned money i can wait till they privatize social security !!!!! so they can take the last drop of american blood and kill it for good so long suckers

December 28 2010 at 2:16 PM Report abuse +1 rate up rate down Reply
skullcrusherst

yeah bankrupcy !! announce that intel i got some intel for ya take off running dont even turn the knob run straight through the glass !!!!!run fast run silent but run !!!!!!!!!!!!

December 28 2010 at 2:08 PM Report abuse +1 rate up rate down Reply
Gumby

Investors will have to prove themselves that they can cut up Visa, MasterCard, Discover, AMex credit cards for good ! Credit cards is nothing but value added taxes!!

December 28 2010 at 1:20 PM Report abuse +1 rate up rate down Reply
Gumby

Young people can tell which year coins were minted but older people need magnifyging glass.. Smartphones is limited...

December 28 2010 at 1:17 PM Report abuse rate up rate down Reply
Gumby

I find smartphones so eye straining to use...

December 28 2010 at 1:16 PM Report abuse +1 rate up rate down Reply