Why Intel Corp. Isn't Manufacturing the Google Pixel Visual Core

Markets Motley Fool

A little while back, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) subsidiary Google announced its new Pixel 2 and Pixel 2 XL smartphones, which target the premium portion of the smartphone market.

Continue Reading Below

One particular feature that has received a lot of attention is the chip inside of these phones called the Pixel Visual Core. The chip, Google says, is a "Google-designed Image Processing Unit (IPU)" that helps enhance the camera capabilities of the Pixel 2 and Pixel 2 smartphones.

Although Google  says it's a Google-designed chip, it recently came to light that Google worked with chip-maker Intel (NASDAQ: INTC) to build the chip. The exact nature of the collaboration between Google and Intel isn't made clear in Google's public statements, but independent analyst Daniel Matte predicted back in August that the chip is a custom-designed part that incorporates technology from an Intel subsidiary called Movidius. 

Intel bought Movidius, a small chip start-up focused on computer vision technology, in late 2016 in a bid to broaden its technology portfolio as the chip giant aims to expand its reach beyond its core personal computer and data center markets.  

I think the evidence is overwhelmingly in favor of Matte's claim.

Now, there has been some speculation that Intel is also manufacturing the chip in its factories as well. However, I think this is highly unlikely. Here's why.

Continue Reading Below

It takes time to migrate to new manufacturing tech

Intel announced its latest Movidius part, known as the Movidius Myriad X, back in August. This part is built using Taiwan Semiconductor Manufacturing Company's 16-nanometer FFC manufacturing technology.

The reason that this part is built using TSMC's technology instead of Intel's is simple: Intel announced its plan to acquire Movidius in September 2016. Chip development cycles, even for something that's relatively simple like the Movidius VPU, are quite long -- we're talking on the order of years. Intel simply wouldn't have had the time to migrate Movidius' technology to its own chip manufacturing technology in time for the Google Pixel 2 product launch.

Furthermore, given that these product development cycles are long, I wouldn't be surprised to learn that the next generation or two of Movidius technology will be manufactured on TSMC technology, either.

For some perspective: Intel completed the acquisition of the cellular modem division of Infineon all the way back in January 2011, but the company won't release its first in-house manufactured cellular modem until next year.

What does this mean for Intel?

Put bluntly, Intel winning the Pixel Visual Core design isn't going to move the needle for the company. Even if Google sells on the order of 2 million Pixel 2 and Pixel 2 XL devices over the next year, and even if Intel get something like $10 per chip, that incremental $20 million in revenue just isn't going to impact the financial results of a company that's on track to generate more than $60 billion in sales this year, per Intel's most recent financial guidance.

So, if the design win itself isn't going to move the needle for Intel's financial results, the manufacturer of the chip won't really matter to Intel's financial results, either.

From a bigger-picture perspective, though, I think that Intel will want to migrate this technology to its own manufacturing technology as soon as practicable so that it can incorporate the Movidius intellectual property into its personal computer and Internet of Things processors.

Finally, if Google's adoption of this technology helps to drum up interest from other smartphone manufacturers -- ones that ship far more smartphones per year than Google does -- then Intel could find itself shipping far more Movidius-based chips. In that case, having those chips built by Intel rather than a third party could help Intel boost its profit margins (since Intel doesn't have to pay the margin of a third-party vendor on top of that vendor's manufacturing costs) and help keep Intel's factories well utilized, which could also help to improve Intel's gross profit margin.

10 stocks we like better than Intel
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Intel wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of October 9, 2017

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Ashraf Eassa owns shares of Intel. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

Outbrain