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IBM, Samsung, and GlobalFoundries Trio Will Hamper Intel’s Margins

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IBM’s 7-nm chip has spruced up the competition

In this series, we’ve discussed IBM’s (IBM) 7-nm chip. Intel (INTC), being a leader in the semiconductor space, now has tough competition on hand. In the previous article in this series, we discussed Intel’s recent product roadmap in detail. The company is still behind schedule for the 10-nm chip, but IBM along with Samsung (SSNLF) and Global Foundries just announced the development of the 7-nm chip, the world’s smallest chip to date. Based on Intel’s statements, even if it cannot ship the 10-nm before 2017, but maintains its tick-tock strategy, it could still have 7-nm chips by 2019.

The above chart shows the number of patents awarded to technology firms in 2015. IBM continues to lead this space, followed by Samsung.

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Increased competition will put pricing pressure on Intel, thus hampering its margins

IBM, Samsung (SSNLF), and GlobalFoundries have a formidable partnership. This partnership is bound to heat up the competition and challenge Intel. Also, if IBM starts licensing the technology, Intel’s peers like Advanced Micro Devices (AMD) and Qualcomm (QCOM) will be in a better position to benefit and enhance their development efforts. Increased competition will pump up the price pressure, translating to contraction in Intel’s margins.

Intel has managed to keep up its margins even in the falling revenue market. However, increased competition will change the scenario, and Intel might have to cut research and development, which will not bode well for the company’s future growth.

You can consider investing in the PowerShares QQQ Trust (QQQ) to gain exposure to Intel. Intel makes up about 3.41% of QQQ.

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