Seeking Alpha
Long/short equity, contrarian, independent research, tech
Profile| Send Message| ()  

Well, Intel (INTC) has got to be the semiconductor firm with by far the worst sentiment on the Street next to rival Advanced Micro Devices (AMD). While the media is keen on spreading rumor after rumor, including those about Apple (AAPL) dumping it in the MacBook line (which I believe is patently false), or about how ARM (ARMH) vendors are suddenly going to supplant Intel in the high margin server space, the reason behind Intel's decline is actually mind numbingly simple: negative earnings growth.

In the third quarter, earnings per share was down 11% from $0.65 to $0.58 and operating income was down a staggering 20% from $4.8B to $3.8B. Net income was down 14%, which means that the buyback is helping to cushion the blow to EPS. So naturally, Intel has lost about 18% of its share price from this time last year, which is just about in line with the magnitude of the negative earnings growth.

At these levels, Intel is now trading -- more or less -- at where its fundamentals dictate that it should be, given today's financial information. Negative earnings growth means a single-digit P/E, and the decline in its stock price is by the magnitude of the operating income decline. So what does this mean?

Well, the good news is that the decline based on fundamentals is more or less done. The bad news is that Intel will now be trading in-line with the general market (negative), coupled with an added helping of anti-semiconductor and anti-PC sentiment.

Be Careful In Buying -- Probably More Downside Ahead

While I'm bullish on Intel's long-term prospects in the mobile space as well as the server space (and heck, I even think as PCs evolve to be more powerful and super-sleek mobile devices themselves, sales will pick up there, too), I don't believe that people should be rushing to throw the entirety of their IRAs into shares of the company just yet.

Take small bites, and add to the position on big gaps down. $0.50/share decrements seems like a good plan, especially as the dividend yield continues to skyrocket on the decline (now at a fairly attractive 4.44%).

The problem here is that there are no near-term catalysts. We won't know just how well PC sales are with the new Microsoft (MSFT) Windows 8 until the current quarter ends and, even then, we'll still need to see how things progress from there.

Further, the lack of a proper near-term catalyst means that there's room for more misinformation to be spread. When it comes to technology, people tend to get carried away, which is why ARM Holdings trades at 65x earnings and 17x sales, while much more attractive and profitable players in the ARM ecosystem such as Qualcomm (QCOM) and Nvidia (NVDA) trade are more modest multiples.

Light At The End Of The Tunnel - Mobile And Servers

Interestingly enough, there will actually be quite a bit of light at the end of the tunnel during 2013. Intel will not only release its next generation "Haswell" chips (which should enable thinner, longer lasting laptops and even very powerful tablets), but it will start to ship its dual core Atom SoC for smartphones paired with its LTE modem. Further, we will get a look at just how Windows 8 tablets are performing in the market place (Intel owns this space, and Windows RT machines simply aren't selling that well).

Further, Intel will continue to aggressively push its way into the server market (in which it commands a staggering lead as it is) by expanding further into the HPC market (with its newly released Xeon Phi), as well as its 22nm refresh of its server chips ("Ivy Bridge EP/EX"), which should not only drive refreshes in the big-iron X86 space (in particular the "EX" model), but also in workstations and networking. All of this with a by-then mature 22nm process that will enable smaller chips and better gross margins.

Finally, the end of 2013 will give us a glimpse into the next generation "Silvermont" processor and the accompanying system-on-chip solutions for smartphones, tablets, etc. This is a ground-up redesign of the Atom core (the current one in smartphones/tablets is five years old, and still is faster/more power efficient than most of the ARM processors, although many people seem to ignore raw technical data for what the media likes to perpetuate) that, given Intel's strength in designing efficient CPUs (compounded further by what is enabled by being on a fundamentally superior process node) should put to bed any doubts that Intel can compete effectively in this space.

Conclusion - Intel Is A Great Company Down On Its Luck

Plainly and simply, Intel is a great company that's down on its luck. PC sales got soft, and the datacenters were also a little less explosive than expected in the most recent quarter, so Intel's net income and revenues took a year-over-year dive.

On fundamentals, Intel's shares have now "priced in" the decline year-over-year in sales and net income. The stock will now trade with the market until the fundamentals improve or a really significant near-term catalyst shows up. I believe Mobile World Congress 2013 should be a good place for Intel to announce smartphone design wins with next generation silicon, and strength there (and/or any more partnerships) could be a nice driver for the stock. Further, as details about Intel's next-gen Atom core and wireless modems come out, sentiment should improve.

To summarize: In the short term, Intel will mostly trade in-line with the market with a negative slant, thanks to the media's general negative sentiment towards the stock, so if you're expecting a massive breakout in the near term, be prepared for more disappointment. In the long term, Intel will do fine as it leverages its considerable technical and financial prowess to, once again, conquer a market that people said Intel could not compete in (servers, anyone?).

Source: Intel: The No-Nonsense Reason It's Down