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The Bull Case

The bull case for Intel (INTC) has been made before; the idea was succinctly summed up by Anthony Grossi in his article The Case for Intel.

  • Intel is a best in breed company
  • Creates the most cutting edge technology
  • Has an R&D budget greater than many of its rivals market caps
  • Has a near 80% market share of the microprocessor space
  • Intel's platform strategy, in which processors are bundled with chip-sets, allows the firm to incorporate more features into its products
  • The firm subsidizes marketing efforts by customers when they highlight the Intel brand. As a result, it benefits from powerful brand recognition.
  • Integrating McAfee Security features to its chips and hardware gives the company a unique value added product
  • The firm's growing server processor segment ensures Intel's place in the cloud

Disregarding this blue chip at dirt cheap prices with a 4.5% dividend could be a mistake, but I want to talk about the bear case.

The Bear Case

The Intel story is well known, the company derives almost all of its revenues from two segments: chips for computers, mainly notebooks; and chips for servers. The stock is down about 30% from its peak because of the increased competition faced from ARM Holdings (ARMH) based chips, which are in the ever-growing phone and tablet market. Intel is under an attack which could lower their profitability much below what the market is currently forecasting.

There are fundamental changes happening which could leave Intel exposed.

1. The emergence of ARM not just as a tablet or phone processor, but for notebooks as well.

X86 has always had the advantages of backwards compatibility, printer, applications and mainly office; the coming addition of an office suit to both Android and IOS is a huge threat to X86-based computers.

When Steve Jobs was grilled about the inability use the iPad as a content creation device, due to its inferior processing speeds, lack of multitasking, and other issues, he replied that those are issues which time usually ends up solving, and so far it doesn't look like he is wrong.

The emergence of ARM-based devices for content creation could be a very big blow to Intel.

2. Intel enjoyed being a monopoly, controlling over 90% of the notebook and server markets.

This may be one of its biggest weaknesses, as ARM devices converge with X86 for basic content creation (Office), profit margins could be pressured as Intel begins facing actual competition from other blue chips such as Qualcomm (QCOM), Samsung, and Nvidia (NVDA).

3. Servers are not safe

If a few years down the line ARM-based chips offer better price to performance points with significantly lower electricity consumption and heat production, we could start seeing a secular change in this market as well.

4. Microsoft is diversifying

I don't know if the Surface RT is going to work out or not, but the biggest name in personal computers certainly believes it is a possibility, and with increased focus on battery life by consumers, an area in which Intel chips are big losers, many customers could buy a product like the Surface RT (9 hour battery life) over Surface Pro (4.5 hour).

5. Longer product cycles

As all types of personal computer hardware advances without the actual software, older computers can do the job as well as newer ones.

Intel may still be a great buy at these low prices, and I would be hard pressed to short it, but the technology industry has always been dangerous, with many prominent investors choosing to remain on the sidelines due to the quick and drastic nature of the changes in the industry. And if in five years people are saying "Intel who?" you shouldn't act surprised.

"A baby was like a revolution, he thought: you could start one, but you could not control how it would turn out."
― Ken Follet

Hope I gave you some food for thought.

Source: Intel - Food For Thought