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Intel: A Case Study In Obsolescence

Summary

Intel reported a slight revenue gain for Q2 but a large income decline y/y.

Faced with increasing competition from ARM architecture processors in the data center and IoT, Intel's expectations of growth in these areas are probably unrealistic.

Intel investors should follow the example of Intel's CEO and sell.

For 2016 Q2, Intel (NASDAQ:INTC) reported a slight revenue gain of 3% y/y to $13.5 billion, while net income plummeted by 51% to $1.3 billion. Despite optimistic predictions of growth, there is no real hope of it. Intel's processor architecture, which has propelled its growth for decades, has simply become obsolete.

Choosing Retrenchment

Following Intel's 2016 Q1 earnings report, I felt that Intel was faced with a very simple choice between retrenchment or transformation. Retrenchment meant clinging to the x86 architecture and squeezing as much remaining profit out of it as possible. Transformation involved much more risk by attempting to become a maker of what is emerging as the new microprocessor standard, ARM Holdings' (NASDAQ:ARMH) 64 bit ARM v8.

Although there didn't seem to be much chance that Intel would choose the more dangerous course, I was willing to allow for the possibility. Intel had hired Murthy Renduchintala from Qualcomm (NASDAQ:QCOM) and elevated this outsider from an ARM processor company to have overall charge of both the Client Computing Group and the IoT Group.

Since then, I've been looking for signs of which way things were breaking. At first, I was encouraged. Not long after the Q1 earnings report, Intel announced that it was discontinuing the Atom X series processors for smartphones and tablets. The Atom X3, (formerly SoFIA) was to have been Intel's big leap into mid priced smartphones. The Atom X5 and X7 series were subsidized through "contra revenue" to be almost free to tablet makers, and found their way into a host of truly awful Android...


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