Intel's past is its own worst enemy

There's just no telling when Wall Street might see the value in this chip-maker.

By Jim J. Jubak Jan 12, 2011 5:04PM
Jim JubakIntel (INTC) will probably report a very good fourth quarter of 2010 on Thursday after the market closes. Wall Street is looking for 50 cents a share -- a 22% increase from the fourth quarter of 2009.

I think Intel is likely to make that number. That would be a very good result for a stock trading at just 11.1 times trailing 12-month earnings.

And I don’t think it's going to matter much at all. Investors have pretty much decided that Intel is a has-been chip stock.     

Think about why this stock trades for just $21 and change.

Intel’s earnings are projected to grow by 93% in 2010, but hanging over that projection -- and the reason that it’s not reflected in the share price -- is a conviction among analysts and investors that the computing market has left Intel behind. Intel may remain the king of the hill -- all right, emperor of the hill -- in the market for desktop and laptop PCs and for servers. But in the new world of computing via tablets (Apple’s iPad and competitors) and via smartphones, Intel is just another chipmaker. And one without the market share of an ARM Holdings (ARMHF) or the style points of the A4 chip, designed by Apple and manufactured by Samsung, that powers the iPad.

With the market moving away from Intel’s core strength, the company will soon be dead in the water, according to Wall Street. Projections for 2011 show earnings declining by 2.2% for the year. And that’s why a stock with 93% projected earnings growth in 2010 sells for just $21 a share.

The truth, in my opinion, is a little more complicated. Intel knows where the market has moved. That’s why it came up with the Atom, a chip designed precisely for the new devices. The Atom hasn’t got much traction in the market yet, but anyone who has followed Intel for years knows the company’s strategy is to put out a competitive chip and then every 18 months come up with a faster, more powerful chip to replace it. And thanks to Intel’s amazingly deep experience with chip manufacturing -- and its deep pockets -- this steady march of chip generations will eventually wipe out all but the most deep-pocketed of competitors.

At least that’s how it has worked in the past.

The real reason not to own Intel now isn’t because the company is indeed done. Or because its longtime partner Microsoft (MSFT) has just announced that it will work with ARM. Or that its strategy won’t work this time. Note: Microsoft publishes MSN Money.

It’s because this time the strategy is going to be really, really expensive. It’s one thing to outspend and out-manufacture an Advanced Micro Devices (AMD), Intel’s longtime punching bag in the PC market. It’s quite another to outspend and out-manufacture Samsung and an entire new generation of competitors such as Qualcomm (QCOM).

Can Intel win this round? Certainly. Can it do it while delivering the 66% gross margin that the company achieved in 2010? No way.

So what investors are looking at is a prolonged battle for the fastest-growing part of the market, which will see sales growth slow at Intel from 24% to 8% in 2011, according to Standard & Poor’s, and that will see gross margins come down to 62% in 2011 and operating margins fall to 31% in 2011 from 37% in 2010.

Of course, most companies would give just about anything for margins like those, but for a while Intel won’t be rewarded for beating all those companies but instead punished for not outperforming its own history.

I’d say that at these prices Intel is now a great value buy -- except that I can’t give you any idea of how long it might be before the stock market decides to see the value in the stock.

When sentiment is this strong against a stock, I think it’s best to step aside. (Unless you can find someone to give you one of those deals that Warren Buffett manages to strike where you get to buy a value stock at a huge discount and someone tacks on an 8% yield so you get paid while you wait. But I haven’t seen one of those cross my desk lately.)

As of Jan. 12, I’m selling Intel out of my Jubak’s Picks portfolio with a gain of 1.8% (plus dividends) since I added it to the portfolio on Jan. 15, 2010. (Intel is set to pay a dividend of 18 cents a share on March 1, 2011 to shareholders of record on February 7, 2011.)

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Intel as of the end of November. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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Jan 12, 2011 7:51PM

Jim the consensus is $.53.  Intel owns 95% of the $55 billion desktop, laptop and server markets where chipsets are greater than $100.  They'll enter the $15 billion smart phone and tablet chipset market where chipsets are $15-30 when their Atom processor is ready in mid-2011.  Wall Street is wrong.


Jan 13, 2011 5:18PM

The more we demand video content on our mobile devices. The less chips like the ARM will be enough. The only possible solution will be the same path as we have seen with PC's. Multi core CPU's and better graphics. Apple seems to have gone the path of using a ARM chip that has been customized. But as we have seen Apple do. They have limited its video to what it deemed capable of. So Flash content from Adobe was considered too much for it.

I think the Atom lacks really good multi tasking abilities which small devices like smart phones have issue doing too. The drive right now is for a chipset that won't be too hard on battery life. Until we come up with better batteries I think our devices will have to choose between CPU performance or battery life.

Jan 12, 2011 8:30PM
There is no reason to suppose INTC will throw in the sponge and fade away. Buy the stock while it is cheap and enjoy the dividends. when the price has doubled, and it will, sell it if you need the money.
Jan 12, 2011 10:02PM

I give 2- 5 years before ARM chips aren't enough in "smart phones" and mobile processors take over. People will expect more and more from their phones and push them into mobile processing. Something like a tablet but with the capacity for serious game play with some battery that needs charging like once a week for an hour. Why do you think AMD didn't get into the mix? Although, I do wonder if it had something to do with Dirks exit?

   The only alternative I see is fiber optic. I believe Moore's law in effect and the Nanometer sizing (on the die) is nearing the size of safe heat dissipation. Even multi-core processors have a limit to size, correct?

Jan 13, 2011 6:12PM

Jim, I checked my file and you were recommending this highly 6 months ago because of the dividend.  At the least that is still a plus.  

PizzaThe company is a powerhouse in many respects and a pretty safe place to invest.  Don't expect any wild surprises !  I see the after hours volume up double normal and shares are up!Thumbs up

Jan 13, 2011 5:56PM

Jim, too bad you're wrong.  Intel posted $.59 EPS and revenue  of $11.5 billion.  I know all the analyst will say yes but MSFT says they'll use the ARM and QCOM is selling $10b of smartphone chips for $16.30 set.  Who cares, Intel will downsize the CICS (complex instruction set processors) and hit QCOM head-on once the smart phones and tablets need full blown processors.  Intel only needs to get a billion a quarter over the next one to two years from that $15 billion market to make QCOM shutter.

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