- Intel released its first commercial drone earlier this month, that could be priced at anywhere north of $30,000.
- Expanding operations in the drone segment could open up a significant revenue stream for the chipmaker.
- Intel might as well move to commoditize parts of its high-end drone tech to disrupt the low-end segment.
Intel Corporation (NASDAQ:INTC) made headlines earlier this month when it released its first ever commercial drone for the mass-market. Unlike amateur drone offerings from companies such as GoPro (NASDAQ:GPRO), DJI and Parrot, the Intel Falcon 8+ is meant for industrial applications such as surveying, scouting, mapping, real-time tracking and aerial inspections. And the price-tag isn’t cheap either; it is expected to be priced at well over $30,000 per unit. With that said, the question at hand is: Why is Intel betting on the drone industry and what are its growth prospects in the field?
- Let me start by saying that the drone industry is expected to explode over the next few years. The market for drone applications is fairly limited as of now owing to government regulations and limitations. But as these limitations get lifted, and regulatory frameworks relating to drone flights take concrete shape across the globe, we could see a dramatic uptick in the demand for these small UAVs. To put things in perspective, PwC estimates that the drone market would grow from its current size of $2 billion to $127 billion by 2020. That’s an explosive projected compounded annual growth rate of about 182% over the next 4 years alone. So Intel is targeting the high-end segment of an extremely high-growth industry, and that makes a solid business case. (See also: Intel Corporation: An Excellent Buying Opportunity)
- In fact, Intel has recently been aggressively making efforts to tap into this explosive growth area. The chipzilla acquired Ascending Technologies, the maker of Falcon 8 drones, earlier this year in January for an undisclosed amount. It had also acquired Movidius last month, a maker of low-power SoCs, that is a supplier for drone makers such as DJI. And Intel also invested $60 million last year in a Chinese drone maker called Yuneec. All these developments illustrate that Intel is pretty serious about its prospects in the drone industry.
- Also, as I mentioned earlier, Intel would be targeting the high-end industrial drone segment with the release of its Falcon 8+ drone that could cost anywhere north of $30,000 apiece. The key thing to note here is that mass-market OEMs such as GoPro, DJI and Parrot do not operate in the segment yet, and there is very little competition in this space. Its primary rival offerings would be from companies such as Lockheed Martin and Boeing, which do not have the think tank, expertise, IP or brand recognition comparable to Intel when it comes to silicon-based technology. So Intel would technically be entering an under-penetrated market segment.
- We also have to note that if the chipzilla is able to achieve 50-60% gross margins on the sale of its high-end Falcon 8+ drones, it could stand to make anywhere around $15,000-$18,000 gross profit per unit. So this could be a highly profitable venture for the chipzilla. Also, its clients could include defense contractors, military, surveyors, along with engineering, agrarian and scientific firms. These entities won’t order just one or two units, and they would perhaps prefer buying a fleet of UAVs to ensure that their work flow isn’t interrupted by drones that have different capabilities. So this could be a significant revenue stream for Intel.
Can Intel make a difference?
- Apart from drone applications, Intel is also investing heavily in the development of its 5G wireless standards. Granted that not much information has been revealed in the public domain yet, and there’s nothing specific as to what the next-gen wireless standard would truly stand for, but we have to consider the fact that Intel might move to integrate its 5G technology with its drone architectures. We could be looking at ultra-high range drones if such a development does indeed take place. If it becomes a blistering success in the field of drones, other drone-makers might as well approach Intel to license its wireless technology. This is just raw speculation on my part and should be taken with a grain of salt, but the point that I’m trying to make here is that Intel could integrate its wireless IP to gain an upper hand over its established rivals in the high-end drone segment.
- Intel can also move to commoditize its high-end drones, and bring (all, or maybe just some parts) of its tech to the sub-$1000 segment in a bid to snatch business away from mass-market OEMs. These drone-makers have been flourishing and Intel could grab a piece of that pie with minimal spend. Intel has the cash, resources and think tank to outclass even the largest of drone manufacturers such as Qualcomm, DJI, Parrot and GoPro. (See also: Intel Corporation Can Hit $48, But Don't Jump In Yet)
- It won't necessarily have to boost its R&D spend, to separately design its drone chips. It already has the IP and infrastructure in place. Intel is merely leveraging its technology into opening a new revenue stream. If it succeeds, its revenues from drones would be sizable. If it fails, it wouldn't be a tragic blow as Intel didn't invest billions for its drone-related ambitions in the first place. So it's a low-risk, high-reward venture for the chipmaker.
- The chipzilla could also achieve better economies of scale if the demand for its drones turns out to be sizable. Its factory utilization rate would increase due to the increased demand for its chips, and the increased factory output should technically lower the manufacturing cost per chip. So this could actually aid in improving Intel’s overall profit margins.
I’m of the opinion that this is a great move forward by Intel. It’s a seemingly low-risk, high-reward venture which makes it all the more appealing for the chipzilla’s shareholders. Such a move will not only add a new revenue stream for Intel, but it will also diversify its operations and give it an exposure to a booming sector. So be bullish on Intel’s drone prospects! If things don’t pan as expected, Intel can always divest its drone-related businesses.
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