Intel Corporation: Should This Keep INTC Stockholders Up at Night?

Intel CorporationThis Might Be a Threat to INTC Stock

To most of the world, Intel Corporation (NASDAQ:INTC) is the 800-pound gorilla in the microprocessor market. However, SoftBank’s recent ARM takeover should remind us that there are other players in this market—and some are definitely a threat to INTC stock…

The financial world was stunned earlier this week when Japan’s SoftBank Group Corp. bought a British chipmaker called ARM Holdings plc (ADR) (NASDAQ:ARMH).

Not only is ARM the centerpiece of Britain’s technology sector, but it’s also a major competitor to Intel and other semiconductor companies. ARM sold more than 15 billion chips last year alone—more than Intel has shipped in its entire existence.

In fact, ARM’s products are in almost 95% of all smartphones. You could be anywhere in the world and it’s likely you’ll come in contact with one of the company’s products. The only downside is that ARM doesn’t bring in a ton of revenue. (Source: “Masayoshi Son arms SoftBank for internet of things,” Financial Times, July 18, 2016.)

The company generated just $1.5 billion in revenue last year. While that’s miniscule compared to Intel’s 2015 revenue, the firm’s potential is large enough to justify a huge price tag.

When I say huge, I mean huge. SoftBank shelled out $31.4 billion for the microprocessor maker, which is a staggeringly high price tag for a company that doesn’t make profits. For perspective, consider that Tesla Motors Inc has a market cap of $33.73 billion.

SoftBank’s eccentric CEO, Masayoshi Son, believes the emerging “Internet of Things” (IoT) space is big enough to justify the price. For the uninitiated, IoT is a trend of integrating Wi-Fi access into everyday items. Lights, refrigerators, toasters—the whole lot becomes connected in the IoT space.

Companies are starting to weave technology into almost every product simply because it makes those products smarter and more efficient. Imagine a refrigerator being able to scan itself and create a grocery list of the items you’re out of and sending it to your smartphone, or a light that automatically adjusts itself to the most energy-efficient level. These are the types of innovations we’ll see very soon.

“I truly believe [the] Singularity is coming and that computers will one day become smarter than mankind,” said Masayoshi Son. (Source: Ibid.)

In using the word “singularity,” Masayoshi is referring to a tipping point in artificial intelligence (AI) research. The idea is that AI software will eventually become sophisticated enough to overtake human intelligence.

Don’t worry, this isn’t like the movie The Terminator, but it does mean that AI could eliminate most service sector jobs. It would literally process information more efficiently and correctly than humans ever could.

While that’s a depressing thought, it exposes an investing opportunity. One company or another has to make the microprocessors that would power this AI revolution. This is why Intel is fighting for chipmaker dominance in the IoT space. It wants what promises to be massive profits from IoT innovations.

I know it sounds like science fiction, but this is happening right now.

Intel and ARM are locked in a sort of arms race. Well, I say Intel and ARM, but really it’s every single microprocessor company in existence. They are all jockeying for position, but ARM just got a leg-up from SoftBank.

The acquisition gives ARM a monster-sized war chest and, in turn, a fully stocked arsenal. ARM could use these funds to invest more heavily in new chip designs or to out-price competitors. Neither strategy was much of an option for the company before this deal.

Intel should also be worried about the fact that SoftBank’s Masayoshi Son was willing to spend so much on ARM. He has a long record of high-stakes bets—and a long history of winning those bets.

For example, Son once bet $20.0 million on Alibaba Group Holding Ltd. It’s now worth approximately $66.7 billion. That’s a gain of 3,335% on a single investment!

And this guy has scored multiple wins on that scale. So, it’s no wonder Intel is nervous about him backing one of the company’s competitors, right?

“Every street light will be interconnected to the internet because we can save when a car is not passing,” he said. “Automobiles will all be connected so driverless cars are much safer. All things will be connected and what is the biggest common denominator? That is ARM.” (Source: Ibid; quotation lightly edited for clarity.)

While I’m not yet convinced this is a death sentence for INTC stock, it’s certainly something that could keep shareholders up at night.