How Intel and Microsoft Dealt Differently With the Same Problem
- By Sangara Narayanan
There are several technology companies that are going through a huge transition. As the world around us changes, so do consumer preferences. Then, more often than not, someone innovates something that totally transforms the world as we know it.
Apple (AAPL) got us into the smartphone era, turning a smartphone into a must-have accessory. Once that started we were hooked on mobile devices, laying the groundwork for tablets to take off. And as tablets grew increasingly more powerful and portable, our dependency on personal computers started nosediving.
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Ten years ago I did everything on my desktop. A few years later, I hardly touched it, using my laptop for nearly everything, including my work. It was easy to carry, small and looked good, too. And then I got my tablet and a smartphone, now the only time I use my laptop is to get my office work done - and once that is over, I am either on my smartphone or on my tablet.
This transition from desktop to laptop to tablet/smartphone is almost complete and if I can name two companies that are facing the heat of this transition, those would have to be Microsoft (MSFT) and Intel (INTC).
Microsoft's Quick Reaction Vs. Intel's Late Reaction
Microsoft took the cloud/mobile route and started tasting success there. There is hardly any visible focus on keeping Windows in the middle and working around it. They have kept cloud in the middle and are working around that instead.
As PC sales declined at a rapid pace, it was a smart move by Microsoft to wean themselves away from Windows-based revenues.
So where did that leave Intel, which was inside most of our computers? For a long time, Intel has powered most of our personal computers, leaving very little market share for competitors to capture. The powerful, new processors kept on coming.
But as people moved to mobile devices, Intel sat there and watched the world slip through its fingers. With PC sales declining and new age competitors such as Qualcomm (QCOM) and Advanced Micro Devices (AMD) running riot in the mobile processor market, Intel's mobile dreams never took off.
They were not ready for the game and, after tens of billions of dollars were pumped in to get a hold of the mobile market, they threw in the towel and hastily retreated to concentrate on data centers and Internet of Things to power their growth into the next decade. That's the reason Intel bought Altera Corp., a company that makes programmable logic semiconductors, for $ 16.7 billion last year to bolster its datacenter-focused business.
The PC industry may never recover its former glory, but it hasn't faded into oblivion. The PC market did show some stability this year and I am sure it will eventually find the bottom and hold on indefinitely to that sales volume.
During the second quarter, Intel's Data Center Group grew 5% year-over-year to reach $4 billion in sales, while their Internet of Things Group grew 2% year-over-year to reach $572 million. The Client Computing group dropped 3% year-over-year to touch $7.3 billion.
Though the company had a better first-half this year compared to what they did last year, they are a long way from being safe. IoT can indeed help the company over time and it's a great business area to step into. I also think their data center business has the potential to rival their core earnings from client computing, but there's one major problem I cannot reconcile myself to. And that's their management.
By the way the company mismanaged their mobile foray and the fact they've lost two key figures in IoT and Client Computing, I would be extremely cautious with this management team and keep a close eye on the company if it were in my portfolio.
That said, I think the downside has already been priced in, with the company trading at a forward P/E ratio of less than 13 .
Disclosure: I have no position in any of the stocks mentioned and no intention to initiate any position in the next 72 hours.
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This article first appeared on GuruFocus.
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