Never has a corporation done so much with something so little. Founded in 1968, Intel Corp. (INTC) has been the world’s leading manufacturer of microprocessors and chipsets almost since its inception. Today Intel is easily the largest semiconductor company in the world, about half again as large as closest competitor, Samsung Electronics Co., Ltd., and more than triple the size of the next-largest domestic producer, Qualcomm Inc. (QCOM).
What separates Intel from most other semiconductor companies is that it fabricates its products in-house. The bulk of semiconductor “manufacturers” farm the actual work of creating the products out to foundries in China. Intel even fabricates chips for other companies, for the most part ones too small to be considered true competitors. Is that a conflict of interest? Not really. Fabrication plants can cost several billion dollars to build, and it makes sense for Intel to keep its busy. (For more, see: The Semiconductor Industry Handbook.)
Intel does indeed assemble chipsets in China, but at Intel-owned facilities. It is received wisdom among some American doomsayers that low labor costs make China the default base of manufacturing operations for U.S. corporations that want to save a few pennies per unit and “ship jobs overseas.” That claim is more accusatory than it is true. At the end of 2016 Intel had a multitudinous workforce of 106,000, approximately half of whom were employed in the United States. Almost half of Intel’s chipsets and microprocessors are manufactured at home, at facilities in the suburbs of Phoenix, Albuquerque, N.M., and Portland, Ore. Outside of China, most of the remaining Intel products are developed in Israel. (For more, see: A Primer for Investing in the Tech Industry.)
The Incestuous World of Chip-sourcing
Even given that Intel fabricates other companies’ chips at its facilities, the business of developing internal computer hardware, selling it, and branding it is more incestuous than you might think. For instance, as of 2007 Apple Inc. (AAPL) began using Intel chips exclusively in its Macs, supplanting the PowerPC CPUs that Apple itself helped develop as part of a consortium. In 2018, it was reported that Apple may use Intel chips exclusively in its new iPhones. By comparison, smaller companies subcontracting to Intel isn’t even that big of a deal.
Intel’s surviving cofounder, Gordon Moore, lends his name to the most famous observation in all of technology. Formulated in 1965, Moore’s Law states that transistor density doubles every two years. Not only has the observation held ever since, but Intel has officially incorporated the law into its company strategy. The company is behind the development of 450mm wafers, the widest in existence, yet still less than a millimeter thick. Once in production, they should allow the exponential progress of Moore’s Law to continue for at least another generation.
So who’s buying all these Intel chips? In 2008, the answer was unambiguous. Hewlett-Packard Co. (HPQ), Dell and International Business Machines Corp. (IBM), not coincidentally the three-biggest computer manufacturers at the turn of the century, were together responsible for $3 of every $4 Intel took in. A mere six years later, with bulky personal computers no longer the devices of choice for a global clientele that values portability and speed, Intel now has eight major customers that are responsible for 75% of its revenues. In 2016, Intel’s three largest customers were responsible for 31% of the firm’s accounts receivable. Intel might obey Moore’s Law, but the Pareto Principle (a.k.a the 80/20 rule) is a different story.
Stagnant Revenue, Changing Market
Intel’s revenue growth has slowed dramatically since the beginning of the decade. Never mind the limits of integrated circuit density, has Intel come up against the limits of the growth to revenue? The people who run Intel are far from stupid, and the company’s transition from monolithic desktops to smaller devices has been underway for a while. Capitalizing on the leverage of its market-leading position, Intel has shifted its concentration to smaller devices and embedded systems. The latter refers to chips placed in something other than stand-alone computers, which can include everything from cars and planes, to traffic signals and factory assembly lines.
Like any corporation of its size ($205.7 billion market capitalization), Intel has an elaborate business organization. The company’s major divisions include the Client Computing Group; which includes desktop computers, notebooks, and tablets, the Data Center Group; which includes products for cloud communications and infrastructure, and the Internet of Things Group; which includes products designed for internet connectivity in areas like retail, transportation, industrial, video, buildings and smart cities. In addition to semiconductors and chips, Intel also produces security software products.
PCs Still King
The era of the 30-pound table-mounted mini tower might be fading, but it’s still very much active and will be for a while. 55% of Intel’s operating revenue comes from its Client Computing business, a ratio that lowers gradually from one year to the next.
Dell Inc. is the company’s biggest customer, accounting for 15% of Intel revenue. Right behind at 13% is Lenovo Group Ltd., which bought IBM’s personal computer business in 2005 and immediately became a huge Intel client, almost by default.
Intel grossed $62.8 billion in 2017. Its business is truly international, with the United States only its second-biggest market. The biggest customer is China, which bought nearly $14 billion worth of Intel products last year. The third-largest market is Singapore, which accounted for $12.7 billion of Intel’s revenue.
The Bottom Line
Some companies dominate an industry, fail to innovate, and fall into irrelevance (e.g. Howard Johnson, Kodak.) Others have great ideas but never manage to capitalize on them. The company that can leverage intellectual firepower with commanding market share is the company that can stay both powerful and relevant for decades. Intel is the archetype, and is situated to continue to be, well into the future.
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