Qualcomm & Intel – Indigestion

Qualcomm doesn’t need Intel.

• The vultures are hovering around Intel and while Intel will make a tasty and nutritious meal for some, I think Intel would end up sticking in Qualcomm’s crop and give it a bad case of indigestion.
• Multiple sources are now reporting that Qualcomm has had discussions with Intel about a possible acquisition which leads me to think that the discussions have happened, but nothing more.
• Furthermore, there are other possibilities for Intel as Apollo is proposing an investment into the company that would provide badly needed cash and improve confidence that Pat Gelsinger is on the right track.
• At a very high level, it is possible to see how Qualcomm and Intel could fit together as Qualcomm designs chips and Intel has factories.
• The problem is that Intel has many other things that don’t fit so well and having known both companies for many years, their corporate cultures are also very different.
• I see the problem areas as:
  • First, x86: which is under assault on all fronts from Arm and accelerated computing.
  • Qualcomm has spent 20 years competing against x86 both in mobile and now far more successfully in PCs where it is on track to take a lot of market share.
  • Consequently, it makes no sense to become the owner of a fading titan when one is in a good position to partially or completely displace it from the market.
  • I see no reason to dilute shareholders to purchase revenues that could very well be coming one’s way anyway.
  • Second, Fabs: where Qualcomm has already established excellent relationships with TSMC, Samsung and GlobalFoundries and knows exactly how to design its chips to be optimally manufactured on these processes.
  • Intel is behind on the leading edge (although it is catching up) and redesigning its chips to be made by Intel (and only Intel in an acquisition) sounds like a risky proposition to me.
  • Even if Intel recovers and becomes the leading semiconductor manufacturing company again, Qualcomm will still be able to access its fabs through Intel Foundry.
  • Taking on this kind of fixed asset ownership has never been part of Qualcomm’s DNA, and owning fabs like these will expose Qualcomm to a level of cyclicality that it has never had to deal with before.
  • Third, Dilution: where this will be an expensive acquisition.
  • Qualcomm would almost certainly pay for Intel with shares which would result in dilution for existing holders of Qualcomm’s stock (of which I am one).
  • Intel’s share price has cratered but so have its fortunes and this means that the shares are not cheap even at $22 per share.
• The one part of Intel that Qualcomm could really use is its relationship with the distribution channel.
• In the PC ecosystem there are vast numbers of participants and ensuring that your products work perfectly with everyone else’s and ensuring that everyone else wants to make their products work with yours is a massive challenge.
• Intel has been at this for over 30 years and so its knowledge, experience and relationships in the ecosystem and the channel are second to none.
• This is how it launched a new chip with 80 designs in the pipeline while Qualcomm despite Microsoft’s wholehearted support could only manage 20.
• Qualcomm has been at this for a year or so and so it has a long way to travel before it can rival Intel in this area.
• This is the one part of Intel that I think could be of great use to Qualcomm but crucially, there is no need to acquire the company to get it.
• I have noticed that a number of the critical personnel have recently left the company, and I suspect that this was not due to the current 15,000 headcount reduction that is ongoing.
• I will not be surprised in any way if they pop up at Qualcomm and are tasked with the recreation of the channel that Intel has developed over many years.
• Hence, I see no reason for Qualcomm to acquire Intel as it looks like it will be able to get the bits it needs without having to also take on the baggage.
• I have always said that at 10x PER, Intel represents good value, but the fundamentals have unravelled faster than the share price which is why I have never been tempted.
• Qualcomm on the other hand has none of this baggage, is opening up new markets for its chips and has opportunities to gain share in markets that are not included in consensus estimates.
• This is why I own Qualcomm and not Intel and will be very happy for it to remain that way.