Are Acquisitions The Way Ahead For Intel?

  • Intel Accelerates Shift From PCs with the Altera acquisition.
  • Altera is just the beginning of a series of acquisitions for Intel.
  • Internet of Things will be the next growth driver for Intel stock.

For over a generation Intel (NASDAQ:INTC) was a builder of technology. It built factories, it built chip designs. The only things it bought was the equipment to make the designs in those factories.

Now, with the acquisition of Altera, Intel has signaled that it has taken a new direction.

Under CEO Brian Krzanich, Intel is going to become a buyer. Instead of using its fabrication plant to drive chip designs, it is going to be buying chip designs to fill its fabrication plants.

The new strategy is the company’s latest effort to deal with Moore’s Second Law.

Also See: Intel Bets On Quantum Computing To Stay On Moore's Law

Everyone is familiar with Moore’s Law, a prediction made by former CEO Gordon Moore for a magazine article over 50 years ago. Chip complexity can double every year or two, meaning its cost efficiency can double, meaning exponential growth in values is possible, without raising costs. Moore’s Law is the primary economic driver of our time.

But there’s a corollary, written into the same article, which is that as the chip complexity increases, the cost of the equipment needed to make that chip also increases, in direct proportion. A chip fabrication plant now costs so many billions of dollars to build and maintain that Intel is one of only four companies left that manufactures microprocessors. Most chip companies are “fab-less,” design houses that farm out production and seek to play the remaining manufacturers off against one another.

Altera was one of those fabless companies. It designs FPGAs -- Field Programmable Gate Arrays. It’s one of the big new trends in chip design, and a big key to the Internet of Things. The chip isn’t just waiting for software, it contains software, and the software it contains defines its function. Intel will pair Altera’s FGPAs with its Xeon microprocessors to create complete, highly-complex products, like security systems in data centers, or processing systems in airplanes. The FGPAs will hold these computers’ software, the Xeon processor will handle its computing, so all that’s left are storage, networking and interfaces.

But that’s not the big story here. The big story is that Intel is now on the hunt for other, similar acquisitions. With PC business on a decline, the future for Intel is its data centers and Internet of Things which will play a crucial role in Intel's growth. Even though IoT contributes a small 5% of the company's overall business, this contribution is expected to grow. The logic being that the data which is stored, processed, and analyzed in data centers is only going to grow in the future, and Intel dominates the market here. You can expect it to buy its way into other markets as well, like mobile.

All this will place strain on Intel’s once-pristine balance sheet. Intel is going to become less a technology company and more a mergers-and-acquisitions story going forward. The most important events of its year won’t be its developer conferences or trade shows showing off products with Intel inside, but press releases where it announces new acquisitions like Altera, and details those costs.

It can work, but Intel’s roadmap needs to identify the right targets, it has to acquire those targets while they remain relatively small, and it is a lot less straightforward than building a fab. For Intel, this is an entirely new business model, and investors need to evaluate Intel stock with that in mind. Results will become choppier, risks will grow, and the world’s greatest hardware company is going to look a lot more like a software company, more like Oracle (NYSE:ORCL) was a decade ago.

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