Intel – "Inside" good markets, outside bad- Huge potential in Memory & Photonics

Intel’s lack of exposure to handsets/China is now a positive rather than a negative

Intel’s strength in “cloud” & servers avoids much consumer weakness in China & developing Markets

Crosspoint has huge upside- Coupled with Photonics it fortifies Intel server dominance

The shoe is on the other foot….
Intel has long been beat up for its lack of exposure and success in the handset market. Analysts, ourselves included, have been negative on the company as it has missed much of the upside in China and other developing markets where handsets and tablets are the consumers device of choice for accessing the internet and being connected.

All of a sudden, exposure to those same markets is a bad thing as consumers, particularly in those markets, are now pulling back their spending sharply, and handsets sales are down. In a perverse turn, Intel now looks good because it doesn’t have much to lose in those markets as compared to many others who rode the rocket up but can’t eject as it returns to earth.

PC market not likely changed very much…
We don’t think that the PC market, both laptop and desktop is impacted all that much by the current slowdown in consumer as the trend was negative anyway and that was built into numbers and expectations. Its the handsets and tablets that are seeing the brunt of the negative turn. Again,this tends to work to Intel’s favor in terms of performance relative to expectations.

The cloud biz will see near zero impact…
Although there is certainly some linkage, we don’t expect nearly as much weakness in the server market and in fact it likely has continued upside given the new processors being rolled out with better power/performance specs. While consumer spending, especially in developing markets is more fickle, and obviously more negative near term, business spending on servers should be more steady. Again this is a net positive for Intel.

Monster potential in Crosspoint memory…
Its been a really long time since a new memory technology has been rolled out. NAND which was the last “new” memory technology can be credited with both creating a new class of products from the Ipod to the Iphone and tablet and accelerating their development by enabling applications. Without NAND we would still be walking around with clunkly Ipods with miniature hard disk drives sucking power with slow performance. NAND made all the difference in the world.

In our view, Crosspoint has even more potential to both create and accelerate new applications in all areas of computing from handsets to servers and have even more of an impact than NAND has had. Crosspoint combines the speed of almost DRAM and the non volatility of NAND into a hybrid with the best of both worlds. We will likely see many new data driven applications as well as substituting Crosspoint for existing NAND applications assuming we can hit the price point, which we think is doable.

Photonics accelerates the data center…
As data centers get larger and larger with thousands of servers spread across acres of floor space communication quickly becomes the bottleneck. Photonics has the opportunity to break that bottleneck with much higher speeds and cleaner network architecture. The potential for improvement is obviously large. Computing power is usually not the problem in data centers. Memory and communications are. When you combine the speed of Crosspoint with the speed of Photonics you get a huge uptick in the overall performance of the data center and thus the cloud.

Intel locks up the data center…
We think the triple threat of new processors, Crosspoint memory and Photonics really fortifies Intels position in the data center and could make it very difficult, if near impossible to crack by competitors. This is great news for Intel as this market segment is Intels “wheelhouse” and the core of their current strength as well as their future in the near and medium term.

With PCs continuing to swoon and handsets & tablets now slowing in developing markets, having the cloud as your core business, and doing a good job of protecting it is key to success & longevity.

Daydreaming – If we were BK for a day….
The very first thing we would do is call Tim Cook and cut a deal to put Crosspoint memory into the Iphone 7 next year to replace the NAND. First, a phone with Crosspoint would kick serious butt in performance versus NAND and both Tim and Intel could crow about it and leave Samsung further behind in the dust. A huge win for both companies and a negative for Samsung (who we think will lose the A10 business to TSMC anyway)

Second, we would take that billion dollar, hole in the ground, echo chamber of an empty fab 42 in Arizona and turn it into a fab dedicated to Crosspoint memory so I could supply enough of the market with Crosspoint to enable new applications and become a serious NAND replacement (much as NAND is replacing HDDs so could Crosspoint replace NAND).

Micron is the master of reuse of existing leftovers and Fab 42 is clearly a left over. Given that Crosspoint can be built using older semiconductor equipment, as its not bleeding edge geometry, Intel could probably scrounge up enough extra tools to lower the cost. Intel has serious upside potential here.

The stock…
We think Intels stock is at an attractive point. Its been on a long slide but has firmed up a bit lately. We think it will look increasingly attractive to investors as they move their money out of harms way in companies that have China, handset, tablet, developing market consumer exposure.

Intels current exposure and markets seem much more resistant to the current worries driving stocks in the market. With strength in the cloud, large upside in new technologies, Intel is suddenly looking much more attractive (especially as the others look much uglier…)

We would likely be buyers here as we see less downside and longer term upside. We would warn investors that all these things will take time and in the mean time the macro news will lower almost all boats but we would use that opportunity to look closer at Intel.

Robert Maire
Semiconductor Advisors LLC