Business Analysis of Intel: Preparation for Valuation

Business analysis of Intel should answer the upcoming challenges from ARM and manufacturing complexity
Another episode from tech giants

Key points of Business Analysis of Intel:

  1. We believe Intel will get benefit from a government program that plans to fund 50 billion for the chips industry.
  2. In the normal old days, the vertically integrated that become Intel’s business model could serve as a decent competitive advantage. In modern days when the chips get smaller and much smaller, that competitive edge fades too.
  3. The chip monopoly with AMD should be a good thing, but this is technology. It needs to be stronger, faster, and better every year. AMD and Intel do not compete with each other. People and media who bring them into the ring.
  4. Even if Intel could beat AMD, the ARM architecture poses a threat to x86 that Intel excels in.
  5. Intel looks cheap in the short term. It has strong connections with laptop vendors, government, and technology. But in the long run, the fierce competition – internal with AMD along with external threats like Qualcomm in the form of ARM – is waiting.

Let elaborate.

We compose this article in order to build some comprehensive understanding before we make some valuation for Intel stock. But we believe this article could also benefit others – like financial and business enthusiasts, as well as students – to get pictures of real-life cases.

Business Model of Intel: Make The US great again
Business analysis of Intel should consider that the chip manufacturer is vital for US economic


Intel’s business model is straightforward. It designs chips and manufactures in-house. So it is vertically integrated, unlike the competitors AMD and Nvidia that only design but give to the third party TSMC to manufacture it.

What is Intel’s target market? What strategy does Intel use?

Intel consumer is the vendor of laptops and PC like Dell, Lenovo, HP, Asus, etc. under the name Intel Atom, the “i-series” (i3, i5, i7, i9). It also sells chips for servers under the name of Xeon. The marketing trick is simple, Intel offers a decent discount for a vendor who wants to use “Intel only” chips. Also, Intel has a connection with Microsoft to make the OS more optimal for its chip.

You call it cheating, we call it a competitive advantage of US connection: Dell – Microsoft – Intel.

Government support is part of Intel’s business strategy

One of the most underrated business edges is lobbying Washington.

And due to its vertically integrated business – manufacturing its own chip – Intel plays a vital part in the US economy, especially for job creation. Along with Texas Instruments and Micron Technology, Intel will get benefit from government help.

The chipmaker will use that line of life to build more facilities and strengthen its economies of scale even more. When demand is high, like in 2021, Intel could fill the gap while the competitor AMD depends on TSMC availability.

Intel competitive analysis
Business analysis of Intel should consider the benefit of the vertically integrated business model.


People and investors think that due to its vertically integrated business model, Intel’s most apparent competitive advantage is economies of scale. Meaning that it could outpace its rival in terms of productivity.

Wrong.

The strongest economic advantage is its x86 patent: There is only two company in this world that can design chips for x86 architecture. AMD and Intel.

Intel looks really strong here, it has economies of scale due to its own manufacturing facility and at the same time enjoys protection as the sole supplier of x86 chips (with AMD)

pros

In which field does Intel lack competitiveness? What are Intel’s weaknesses?
Business analysis of Intel should consider the drawback of the vertically integrated business model.


In the ideal world, Intel and AMD should enjoy their position in the duopolistic market. Like Boeing and Airbus, AWS and Azure, GE healthcare, and Siemens. But we talk about technology here, something that has to be very dynamic. The tagline if it is ain’t broken why fix it. Even when all is good, Intel and AMD must fix their chip – even if it is not broken.

The chips should be more powerful, have more features, more energy efficient.

And here is come the problem.

Intel and AMD should make their best effort every year (almost actually, but you get my point)

They have to design better and better chips even when the old chips are ok…

And this gives more disadvantages to Intel.

When the chip becomes smaller, it needs a more astronomic R&D budget. Making a 32 nm chip to 30 nm is much easier than making a 7 nm chip to 5 nm. It is not linear. AMD just design it and leave the manufacturing complexity to TSMC while Intel has to do both – financially and technically.

Chip industry: ‘the vertically integrated business model has no power here.’

The Rise of The Mobile

Another headache for Intel management is the rise of mobile devices. This kind of computing tool not only requires high-speed performance but also demands efficiency. It needs to be powerful yet energy efficient.

the bad news is that x86 is far inferior to the other kind of architecture: ARM. As we see in Apple Macbook with its M series processor. It delivers great computing power but with an extremely durable battery. The windows laptop begin to replicate this path by collaborating with ARM-based chip designers like Qualcomm under its Snapdragon brand.

We don’t know how Intel could overcome this situation.

Intel SWOT analysis 2022: Intel Has a lot of homework
Recapping what we have from the Business analysis of Intel.


So, let’s summarize:

  1. Intel’s strong points are its patent and economies of scale, but it will be challenged by ARM architecture and a more complex manufacturing process due to smaller chips.
  2. The weakness is its integrated business model. This reminds us that what was the advantage, becomes a liability someday.
  3. The computing need is growing. Laptops and PC become more vital today.
  4. The threat is surely Qualcomm and AMD, both are representations of ARM and x86 itself.

Read also: https://investingdeck.com/competitive-advantage-in-the-computer-industry/