Intel Q314A – Waiting for Godot

Core M is the key to a laptop replacement cycle.

• Intel reported solid Q314A results as corporate PC demand continues to keep the PC market on an even keel. .
• Q314A Revenues and EPS were $14.6bn / $0.66 compared to estimates of $14.4bn / $0.65.
• Intel won market share from AMD during the quarter, but that aside, the market has remained supported by corporate demand from developed markets.
• This has a lot to do with the upgrade of PCs from XP to Windows 7 as well as a normalisation of inventory compared to this time last year when vendors were extremely cautious.
• In anticipation of a more normal Q414E, guidance was a little ahead of expectations with revenues of $14.2bn-$15.2bn (midpoint $14.7bn) forecasted.
• This compares favourably with the consensus which is expecting $14.5bn in revenues in Q414E.
• The take home message from these figures is that the PC market remains steady thanks to the corporate upgrade cycle.
• I am reasonably comfortable that Windows 10 will enable that cycle to remain steady and that the PC market is not about to start declining again.
• Against this backdrop I see opportunity.
• The most significant event during the quarter was the launch of the Core M family of products which I think are key to changing the PC landscape.
• The Core M family are 14nm processors that use Intel’s 3D transistor technology and come with a meaningful power efficiency improvement.
• This means that for the first time, PCs no longer need fans, enabling all the power of a laptop to be put into a form factor like the iPad Air.
• Using Core M, the Microsoft Surface Pro 3 could be reduced in thickness by 2mm and weight by 200g.
• This would make it 7mm thick with a weight of 600g. By comparison the iPad Air is 7.5mm thick with a weight of 469g but it only has 9.7inch screen compared to the SP3 at 12 inches. ,
• 7mm thick and 600g is pretty much what I am expecting for the Surface Pro 4.
• Having the full power of a laptop in a 12” tablet that weights the same as the iPad renders the laptop form factor obsolete.
• The only reason to have the keyboard physically attached to the screen is to create space for the components and the battery.
• This is no longer necessary and users no longer have to make the compromises in terms of ergonomics and ease of use when it comes to using portable computers.
• Unfortunately, users have been making this compromise for 30 years and the marketing departments of Microsoft and the OEMs are so blinded by legacy that they have yet to realise that the laptop form factor is now obsolete.
• These new devices are in fact “Portable Desktops” and offer a whole new series of use cases all of which are superior to a laptop.
• Furthermore, there is no longer a need to buy a tablet meaning that the budget for laptop and tablet can be combined when considering the new devices.
• The problem is that the users have no idea how much the computing experience improves with these devices and until they get it, the cycle is unlikely to take off.
• This means that until the companies stop trying to sell these devices as laptops, users are going to remain horrified at the prices being charged and sales will stagnate.
• I expect this problem to be solved eventually but consequently it is impossible to say when the replacement of the laptop will really begin.
• Fortunately, the valuations of the two main beneficiaries, Microsoft and Intel, are not too demanding and so investors can afford to wait.