I was mildly surprised with the Intel purchase of McAfee, which is somewhat better than being bored by the Dell/3PAR deal. At least HP has come along and made the plain girl in the corner appear more interesting. Anyway, moving on to Intel/McAfee…

Nobody refutes the fact that security is an extremely important aspect of cloud infrastructure. All the enterprise systems players take it seriously and have been building on their solutions for years. Companies like Cisco, EMC, IBM and Microsoft have spent a small fortune on both development work and acquisitions in security.

Intel is always looking for ways to add more functionality and value around their core chipsets, so security algorithms and embedded processing make sense. But these are technologies and techniques that can be either licensed (probably for no money up front and a very small royalty) or acquired through what would really be technology acquisitions that are counted in the millions of dollars rather than billions.

In fact, we’ve found little companies like Zix Corp (ZIXI) that have embedded solutions that make email and messaging in applications within healthcare and financial services secure and encrypted, all in the background and at very low cost. This type of technology is available, deployed broadly, and not expensive.

So why buy what is really a large scale consumer and enterprise business to go after a slice of the embedded infrastructure that is needed for cloud and mobile computing?

Sadly, the answer I keep bumping into is “because they can,” and a company their size “needs to do something big” so that people believe they are “serious” about the space. These are lousy reasons from an investment standpoint. Furthermore, it’s also lousy from a business standpoint. One way to show how serious you are is to deliver outstanding solutions. Intel sold their anti-virus business to Symantec over a decade ago and certainly knew about putting security primitives into the core back then, but hasn’t pursued the security market with any gusto during this time.

To be fair, Intel, after many struggles, has managed to finally integrate and embed at least some level of core networking and graphics processing into their chipsets. I’d be willing to bet that this came at horrific costs looking back 10 years but it’s there today and memories are short.

It isn’t that security integration doesn’t make sense, it’s that Intel could have done it fairly easily already and licensed or acquired key technologies along the way easily and at much lower costs. That is what adding value is all about from a management standpoint, building and buying assets that you then make into something far more valuable. In this case Intel paid the premium for McAfee shareholders and took $3B+ out of their own shareholder pockets.

The example we see pointed to most often is EMC. EMC did diversify away from a pure storage company with a steady stream of purchases including RSA, Documentum and VMWare to name three (there were many more.) But then that asks for the question “Is that Intel really going to embark on a software infrastructure strategy?” That would suggest they might be interested in companies like Akamai (AKAM), Solar Winds (SWI), Progress (PRGS), Adobe (ADBE), BMC (BMC) etc.

The good news there is that these are some of the few technology businesses that have higher gross margins than the existing Intel business. The bad news is that Intel doesn’t know anything about running a software company. They might be able to learn (so far not so good…) but if they do it’s going to cost plenty.

McAfee will be disrupted by the acquisition, as is the case 99% of the time in acquisitions like this. What happens in the wake will be telling insofar as to whether Intel management is here to build shareholder value or serve their ego and succumb to laziness by acquiring big chunks of market position without wishing to do the work to build them or even keep them. Unfortunately for them, they started out with a 15 yard penalty right at the kickoff so they have that much more work to do.

On the margin this is also good news for a recovering Symantec, which has been making progress but can certainly use a bit of wind at their back which is what this deal is likely to do – at least for the next 12-18 months.

[Disclosure: No positions although an asset management partner of R2, Aberdeen Investment Management, owns shares in Zix Corp.]

Just as we published a research note highlighting some key takeaways from the recent Gilder Telecosm, we see the news that Intel has suspended their immediate plans to enter the discrete GPU market.  From the day we published our Nvidia note on January 29th “Transition is Opportunity for Nvidia” there as been a measurable increase in the rivalry between Intel and Nvidia over the increasingly-important GPU market.  Since we have been highlighting Nvidia as the leading company we’re pleased to see the news but it’s also just a blip on what is becoming a monster technology growth and investment area.

In fact our note highlights the fact that the RealVR and Cloud Computing themes are already converging.  Taken together this represents probably more than 100% of technology market growth in the next decade (although Digital Power and Biological IT will help too.)  Inside this new mega-theme we include all forms of consumer and enterprise cloud computing and the mobile Internet.

Intel still dominates the integrated graphics chipset market so the news is more interesting for AMD and Nvidia.  AMD now is unique in offering both mainstream x86-based CPU options and their own quite powerful GPU chips as well.  Nvidia leads in the mobile and embedded space by a wide margin and has been racking up design wins with Tegra and the ION platform.  Both AMD and NVDA are working with partners to bring GPU computing into the cloud in a serious way.  We are seeing early applications of this technology already.

Although our RealVR Cloud observation steals the show in our Gilder Telecosm update there are other important implications including: much better prospects for investments in alternative energy, particularly Digital Power, now that the unrealistic expectations have been burned off, and more disruption is in store for the very large and stodgy education market.

[Disclosure: At the time of this writing Research 2.0 holds shares of NVDA in their model portfolio.]

Since we published our report on NVDA back on January 29th the shares have vaulted to $12 then sunk back to near $8 and are now sitting in the middle at $10.50.  Our intrinsic value (IV) estimate remains $15 which is a level we think the stock will see this year.  But the story is filled with drama so the levels on the stock are likely to continue to be all over the place.

These two *adjacent* Twitter messages illustrate the situation in a nutshell:

Two adjacent tweets tell the story

Intel has clearly awakened to the threat from the GPU in general and Nvidia in particular.  Larrabee is a very powerful and potentially useful chip but to us it appears to be aimed at the high end of the market which is not where the growth is now.  Over time we expect servers to handle more graphics processing (See our report “Shake Up Time in the Gaming Industry” for more details on that.) but now the trend is towards laptops, netbooks and even smart phones.

Nvidia clearly has been building a lead here. First with the Apple deal and now with a stream of design wins and announcements around their new Tegra and Tesla platforms.  Next week at Computex Taipei many more will be added to the fray.

The overall context here is that visual computing is going mainstream and obviously a GPU is an important part of making that happen.  Arguing the Nvidia versus Intel case is a waste of time if it weren’t for a history of somewhat anti-competitive behavior from Intel.

In short we are fairly certain that Nvidia will come out a winner from this trend.  After all they are the only company 100% focused on this market and it’s finally coming into it’s own.  Yes, we know, margins are a concern.  However we’ve made fairly conservative assumptions in coming up with our IV of $15.  The company also has generated very high returns on invested capital and sits with a large cash reserve.

In addition to the news out of Computex next week the company will be hosting their annual analyst meeting on June 16th.  It’s no wonder that volume on the June options has skyrocketed in recent days. We expect fairly large sums to be won and lost in the next few weeks as investors apply intense pressure to “figure it out.”

[Disclosure: Research 2.0 maintains a variety of positions in NVDA stock and options, both long and short. At the time of this writing they would be described as "net long in aggregate."]

Intel is a tough competitor.  Maybe not as ruthless as Microsoft was but they know many of the same plays.

For example recently Intel has taken steps to tell manufacturers that it will not "unbundle" their own 945 graphic chipsets from the Atom processor lineup.  This has the fairly simple effect of locking out or making it very hard to justify a GPU from NVidea or AMD/ATI in any design.

Intel is obviously trying to control the market and ensure that Atom-based systems are useful but not too useful which they could be if other chips could be integrated into the design.  Since it is a legitimate threat one can understand Intel being concerned.  But how about competing on features and price instead of using market power to block better solutions from other companies?

As the web enters a new phase of more visual, more mobile computing it’s going to be important for the market to have freedom in designing the right architectures for these new applications. Rather than lead the way Intel seems to be keen to block innovation and eliminate those that try to compete on it.

We will always have a soft spot for Intel because they provided an educational grant to me when I was a kid to design S-100 CPU boards based on their then-new 8088 and 8086 designs.  But this behavior is sad and hurts technology in general.

[Disclosure: At the time of this writing we have a major emphasis on visual/mobile computing and a small position in NVDA shares.]