During an analyst day in early 2017, chip giant Intel (NASDAQ: INTC) talked about how it had dramatically grown its total addressable market, or TAM, by investing in and building products for markets beyond personal computer and server processors.
Intel said that the company's traditional total addressable market, which consisted primarily of personal computer processors and server processors, was worth around $45 billion and its share within those markets was extremely high.
At that investor meeting, Intel said that its new combined TAM would be worth about $220 billion by 2021. That TAM expansion was being driven not by any change in Intel's view of the opportunities in the personal computer market, but by the addition of new segments like non-volatile memory, mobile, and the Internet of Things. Intel has also broadened its horizons in the data center market from just server processors to a wider range of markets (e.g. network processors, memory modules, connectivity products, and more).
The implication, though, from Intel's presentation at the time was that it viewed the personal computer market as a cash cow to, more or less, be milked for maximum profitability rather than as an area that could drive significant growth for the company.
Intel's view, a year later, seems to have completely changed. Let's take a closer look.
Image source: Intel.
Double the fun
During Intel's most recent stockholder meeting, the company said that its opportunity in personal computers and adjacent products would be roughly $60 billion by the 2021 time frame, a doubling from its previous view of the opportunity in personal computers.
That doubling came as Intel added the following opportunities to the mix:
- Intel Optane technology
- Home gateway
- Augmented/virtual reality
Let's break down why Intel likely views these as significant and new opportunities.
The Optane opportunity
Intel counts Optane Technology as part of both its "PC and Adjacencies" TAM and its "Non-Volatile Memory" TAM, so it's not clear what Intel is counting in each segment. My assumption is that Intel counts typical solid-state drives under non-volatile memory, and it counts its Optane Memory technology as part of the opportunities in the "PC and Adjacencies."
Optane Memory is a small storage drive that uses the company's fast 3D XPoint memory technology to accelerate the overall storage speed of a computer. The idea is that a system with Optane Memory and a large, traditional hard disk drive can deliver similar performance to a system with a NAND flash-based solid-state drive.
It's not clear what the total opportunity is here, but for some perspective, a 16GB Optane Memory product costs $25, and a 32GB one can be had for around $60. Let's assume that Intel can achieve 15% penetration of Optane Memory in PCs over time and that 70% of those systems use the $25 configuration and the remaining 30% use the $60 configuration.
Let's also assume that Intel gives significant volume discounts to major PC makers, putting the true cost of the smaller part at around $15 and the larger one at around $30. The total opportunity, assuming an overall personal computer market that's about 200 million units shipped annually, could be nearly $600 million to Intel.
That's not huge, but an incremental $600 million in revenue from selling technology that's already being developed for other markets would be quite nice. That opportunity could be bigger if Intel can do better than the 15% attach rate assumption that I used.
Intel has been in the market for cable gateway processors for quite some time with its Puma line of processors. Intel doesn't talk about this business much nor has it really broken down how much revenue it generates and what kind of margin profile it delivers (the financial results are rolled into its larger Client Computing Group business, which mainly consists of personal computer processor revenue), but there are some third-party estimates out there.
According to an early 2015 report from The Linley Group, Intel's wired communications chip business, following Intel's acquisition of DSL chipmaker Lantiq, "should generate about $1 billion in [communications integrated circuit] revenue."
Although I don't doubt that this is a growth market for Intel to try to capitalize on, it's probably not large enough to really drive a significant portion of the TAM doubling that Intel is talking about.
Augmented and virtual reality
The final new opportunity that Intel cited is augmented and virtual reality technology. This is quite vague, but I think I can speculate a bit as to what Intel means here.
Future augmented and virtual reality headsets are likely to come in multiple different forms. Some will be tethered to a personal computer (this applies more to virtual reality), while others will likely have the main computing components (e.g. processor, memory, storage) built right into the headset.
I could see Intel following in the footsteps of Qualcomm, which recently announced its Snapdragon XR1 platform specifically for augmented and virtual reality headsets, in developing and selling chips designed specifically for non-tethered headsets.
On top of that, though, I think Intel is thinking a lot about the opportunity in the market for tethered headsets. Intel, again, wouldn't sell such headsets, but the company might be betting on increased demand for high-performance computers powered by its chips to connect to those headsets.
Additionally, Intel recently announced its intent to enter the market for discrete graphics processors. Intel might be counting the potential opportunity there under "augmented reality" and "virtual reality" because those stand-alone graphics processors would certainly help Intel's ability to profit from virtual reality-capable personal computers.
More broadly, though, I think Intel grew its TAM estimate precisely because it intends to enter the market for stand-alone graphics processors, which is large and growing rapidly. My guess is that this is the single biggest contributor to the company's newly optimistic view of its opportunity in the personal computer market.
Ultimately, it looks like Intel has realized that even though the overall personal computer market could remain flat or even decline in the coming years, there are opportunities for the company to grow its dollar content share within each computer sold. What this likely means, then, is that the company will probably start boosting its investments here again as, internally, the company undergoes a mental shift from "the personal computer market is a cash cow to be milked" to "there's a lot of growth to be had within the personal computer market that we need to invest in to capitalize on the opportunities ahead."
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