Intel Corp. (Nasdaq: INTC) is changing alright, but in such incremental and deliberate ways, the process may be near conclusion before its rivals, investors, and many industry analysts realize the extent of the dramatic turnaround the current management is trying to execute.
Over the course of the next five to 10 years, and certainly before the end of this decade, I expect dramatic changes in the operating model of the company, its end-markets, as well as competitors and customers. The changes will determine whether it stays atop the global semiconductor market as the biggest vendor by revenue.
For investors, the emerging Intel is already a puzzle, as evidenced in the weak valuation that followed the announcement of the company's fiscal fourth quarter results last week.
The Intel that is being refashioned out of the enterprise that has dominated the microprocessor market will be a manufacturing giant with unparalleled manufacturing resources and IP portfolio. It will become a leading semiconductor foundry and partner to many of today's OEMs -- and future OEMs -- in key telecom and data networking equipment markets. That Intel won't walk away from its traditional PC microprocessor business -- unlike when it exited the memory semiconductor market. Rather, it will continue as the dominant supplier to whatever remains of its traditional PC microprocessor OEM customer base, but without the current overwhelming dependence on them for a majority of its sales.
That's not all. Within the next five years, Intel will morph into a powerhouse supplier of chips to data-equipment companies, in addition to becoming one of only a few IDMs capable of offering extensive foundry-style services (semiconductor wafers) to leading OEMs in high-margin and highly specialized IT equipment markets.
In other words, in a very short time, Intel has the potential to become more recognized and rewarded for its services as a customized wafer foundry company than simply a vendor of chips to either the traditional PC or mobile device (tablets and smartphones) markets.
The foundation for that future is being laid right now, and (perhaps rightly so) Intel is being punished by investors for the decisions it has taken in pursuit of those goals. Rather than reduce capital expenditure in response to slowing sales, for instance, Intel is pouring more funds into infrastructure and next-generation manufacturing processes.
Though it forecasts "low single-digit percentage increase" in revenue due to challenges in the PC segment, in 2013, Intel plans to spend about $13 billion on capital equipment -- in furtherance of 14 nanometer and 10 nanometer plans. Capex for 2012 was about the same level as is now being projected for 2013.
Other numbers support the theory that Intel will be spending more in the future to further some of the goals identified above, rather than scale back its investments. Total R&D and marketing, general, and administrative expenses for 2013 are projected at approximately $18.9 billion, even higher than the $18.2 billion it spent in 2012 and the $16 billion from 2011.
Paul Otellini, president and CEO, defended Intel's spending decisions for 2013, and noted that the capex would help the company maintain its manufacturing prowess, giving it the edge it needs to stay ahead of the competition in the PC segment, as well as in tablets and smartphones. The high capex will probably be maintained even in 2014 and 2015, according to Intel CFO Stacy Smith.
"The world's leading edge fabs are the single greatest asset that we have," Otellini added during the conference call.
I agree, but I've long been a fan of Intel and its "only the paranoid survive" investment and managerial mentality. However, for many others in Intel's public domain, maintaining a strong capex and operating expenses budget in the face of weakening PC sales may not make sense, especially since the company is getting clobbered by ARM in the mobile communications equipment market.
Intel certainly has major challenges, but those who focus on its failure to make inroads into the ARM-dominated mobile segment need to take a closer look. If Intel successfully makes the transition I've outlined above, neither ARM's current success, nor the weakness (today or in the future) of the PC market will matter a great deal. The majority of Intel's sales would be independent of each segment, and it would have fashioned a new business model for what some of today's embattled IDMs could become -- had they Intel's deep pockets.
First, though, it must successfully make that transition. Failure would turn the "greatest asset" that Otellini talked about last week into the greatest millstone around its neck.