Never has a corporation done so much with something so little. Founded in 1968, Intel Corp. (INTC) has been the world’s leading manufacturer of microprocessors and chipsets almost since its inception. Today Intel is easily the largest semiconductor company in the world, about half again as large as closest competitor, Samsung Electronics Co., Ltd., and triple the size of the next-largest domestic producer, Qualcomm Inc. (QCOM).
What separates Intel from most other semiconductor companies is that it fabricates its products in-house. The bulk of semiconductor “manufacturers” farm the actual work of creating the products out to foundries in China. Intel even fabricates chips for other companies, for the most part ones too small to be considered true competitors. Is that a conflict of interest? Not really. Fabrication plants can cost several billion dollars to build, and it makes sense for Intel to keep its busy. (For more, see: The Semiconductor Industry Handbook.)
Intel does indeed assemble chipsets in China, but at Intel-owned facilities. It is received wisdom among some American doomsayers that low labor costs make China the default base of manufacturing operations for U.S. corporations that want to save a few pennies per unit and “ship jobs overseas.” That claim is more accusatory than it is true. Intel has a multitudinous workforce of 107, 600, most of whom are employed in the United States. Almost half of Intel’s chipsets and microprocessors are manufactured at home, at facilities in the suburbs of Phoenix, Albuquerque, N.M., and Portland, Ore. Outside of China, most of the remaining Intel products are developed in Israel. (For more, see: A Primer for Investing in the Tech Industry.)
The Incestuous World of Chip-sourcing
Even given that Intel fabricates other companies’ chips at its facilities, the business of developing internal computer hardware, selling it, and branding it is more incestuous than you might think. For instance, as of 2007 Apple Inc. (AAPL) began using Intel chips exclusively in its Macs, supplanting the PowerPC CPUs that Apple itself helped develop as part of a consortium. However, Apple uses a different company’s processors in its mobile devices (Samsung). Yes, each iPhone is powered by a chip manufactured by the same company that makes the iPhone’s biggest competitors. By comparison, smaller companies subcontracting to Intel isn’t even that big of a deal. (For more, see: .)
Intel’s surviving cofounder, Gordon Moore, lends his name to the most famous observation in all of technology. Formulated in 1965, Moore’s Law states that transistor density doubles every two years. Not only has the observation held ever since, but Intel has officially incorporated the law into its company strategy. The company is behind the development of 450mm wafers, the widest in existence, yet still less than a millimeter thick. Once in production, they should allow the exponential progress of Moore’s Law to continue for at least another generation. (For related reading, see: How to Invest in Samsung.)
So who’s buying all these Intel chips? As recently as 2008, the answer was unambiguous. Hewlett-Packard Co. (HPQ), Dell and International Business Machines Corp. (IBM), not coincidentally the three-biggest computer manufacturers at the turn of the century, were together responsible for $3 of every $4 Intel took in. A mere six years later, with bulky personal computers no longer the devices of choice for a global clientele that values portability and speed, Intel now has eight major customers that are responsible for 75% of its revenues. Intel might obey Moore’s Law, but the Pareto Principle (a.k.a the 80/20 rule) is a different story.
Stagnant Revenue, Changing Market
Intel’s revenue has stagnated over the last five quarters, and despite a recent increase still hasn’t reached the level of the summer of 2013. Never mind the limits of integrated circuit density, has Intel come up against the limits of the growth to revenue? The people who run Intel are far from stupid, and the company’s transition from monolithic desktops to smaller devices has been underway for a while. Capitalizing on the leverage of its market-leading position, Intel has shifted its concentration to smaller devices and embedded systems. The latter refers to chips placed in something other than stand-alone computers, which can include everything from cars and planes, to traffic signals and factory assembly lines. (For more, see: Intel Working Through a Difficult Transition.)
Like any corporation of its size ($170 billion market capitalization), Intel has an elaborate business organization. The company’s four major divisions are PC clients; data centers; software and services; and other, which includes the phones, netbooks, tablets, other new devices, and similar systems that Intel is banking its future on. Indicative of the changing world, that last segment debuted in the company’s financial statements in the most recent quarter. Intel’s new CEO plans to sell 40 million chips for tablets in 2014. (For related reading, see: Will Qualcomm Weather the Storm.)
PCs Still King
The era of the 30-pound table-mounted mini tower might be fading, but it’s still very much active and will be for a while. Two-thirds of Intel’s operating revenue comes from its PC client group business, a ratio that lowers gradually from one year to the next. To the extent that PC client sales decrease, data center sales increase. The colossal servers that power the biggest applications in all of computing run on Intel processors, to the tune of $11.1 billion per year. But still, if you account for expenses, PC clients make up almost the entirely of Intel’s profits – 96%. Hewlett-Packard remains the company’s biggest customer, accounting for 1/6 of Intel revenue. Right behind at 1/8 is Lenovo Group Ltd., which bought IBM’s personal computer business in 2005 and immediately became a huge Intel client, almost by default. (For related reading, see: Will the Personal Computer Industry Ever Rebound?)
Intel grossed $52 billion last year. Its business is truly international, with the United States only its third-biggest market. The biggest customer is a little city-state at the tip of the Malay Peninsula that’s both densely packed and efficient – the geopolitical equivalent of an Intel Core i7 processor. Singaporean manufacturers bought $11 billion worth of Intel products last year, which is down from $14 billion in 2011. Intel’s geographic base is hugely Asian, with China second at $10 billion and, if trends continue, overtaking Singapore by the end of 2014. American and Taiwanese customers are at about $9 billion each, followed by Japan at $4 billion. (For more, see: 3 ETFs to Play the Semiconductor Rally.)
The Bottom Line
Some companies dominate an industry, fail to innovate, and fall into irrelevance (e.g. Howard Johnson, Kodak.) Others have great ideas but never manage to capitalize on them. The company that can leverage intellectual firepower with commanding market share is the company that can stay both powerful and relevant for decades. Intel is the archetype, and is situated to continue to be, well into the future. (For more, see: Still More Gains Ahead for Semiconductor Makers.)