Must-know: There’s still hope for Intel investors
Exciting times are ahead for Intel – strong 4Q14 earnings (Part 15 of 16)
Margins are expected to improve
As we discussed earlier in this series, Intel (INTC) plans to launch a few products based on 14nm technology. However, 14nm technology’s yields—compared to its predecessor 22nm technology—aren’t satisfactory. Actually, they’re increasing the company’s cost structure.
Due to some technical glitches, the launch of some products—based on this technology—was postponed to 2015. As these products are launched and 14nm becomes a larger mix of Intel’s product portfolio, costs are expected to decline and match their prior technologies.
You can consider investing in the Market Vectors Semiconductor ETF (SMH) or the Technology Select Sector SPDR Fund (XLK) to gain exposure to Intel. Intel makes up about 19% and 3.55% of these ETFs, respectively.
Intel’s manufacturing expertise leads to economies of scale
As the above chart shows, 73% of Intel $11 billion budget, or around $8 billion in 2014, is a shared investment. It means that this $8 billion is allocated to Intel’s different divisions—PC Client Group, Data Center Group, IoT (Internet of Things), and MCG (Mobile and Communications Group). Recently, Intel received a lot of criticism due to its contra revenue pertaining to MCG.
However, by following the contra revenue strategy, it entered into relationships with OEMs (original equipment manufacturers). To an extent, it successfully obtained the support of apps developers to ensure that Intel architecture works with the majority of apps designed for Google’s (GOOG) (GOOGL) Android and Microsoft (MSFT) Windows.
Since Intel’s core development costs are shared across several big divisions, it enjoys significant economies of scale. It can leverage its IP and manufacturing expertise. It can enter new geographies with relatively limited incremental costs—provided that the execution is done in a timely manner.
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