Seeking Alpha
Long/short equity, value, contrarian, special situations
Profile| Send Message| ()  

Intel (INTC) stock has had a rough time of late, falling over 16% year to date and over 30% from its 52-week high of $29.27 set earlier this year. On top of that, Paul Otellini announced that he will be stepping down as CEO next year, creating even more uncertainty among shareholders. This all comes as the company faces intense pressure in its chip business from the mobile and tablet markets. Qualcomm (QCOM), which recently took away Intel's position as the world's largest chip maker, is leading the way with its smartphone chips. Qualcomm chips are in basically all mobile devices, ranging from the Google's (GOOG) Droid RAZR M to Nokia's (NOK) and Microsoft's (MSFT) Lumia 920.

This loss in market share has resulted in a contracting of margins for Intel. Intel's margins, which used to be as high as 65%, are now averaging 55%. As more and more consumers make the move to mobile devices, PC sales will continue to decrease, which ultimately has negative effects on the overall revenue that Intel can realize. Qualcomm, on the other hand, currently is in a perfect position to capitalize on this move to mobile devices, and consequently has seen its margins continue to expand.

Even though it already seems clear that Intel is not adapting to the times, it is rumored that the company is proposing the idea of supporting Apple (AAPL) with all of its ARM chips. With tensions currently high between Apple and Samsung Electronics Co., Intel is hoping to capitalize on this opportunity to increase overall market share and gain penetration into the mobile market. Unfortunately, the overall consensus from the analyst community is that the total impact to Intel's bottom line would be minimal.

In a Morgan Stanley report released Monday, the analysts wrote that with strains in the relationship between Apple and Samsung, recent media speculation has been that they could win some business making ARM chips for Apple. We analyzed the opportunity with some key questions/assumptions about profitability, and conclude the impact is likely "small." The report goes on to estimate that the total financial impact that Intel could possibly receive if this deal did indeed go through would be about $1.7 billion, with 12.5% in operating margin.

As Intel works to begin making and selling chips in the mobile market, Qualcomm is working to increase its exposure in other markets. Last week, it was announced that Qualcomm planned to acquire a 5% stake in electronics maker Sharp, Inc. Sharp, which has been experiencing heavy losses in its electronics sector, has been looking for a large capital infusion to help repair its cash-strapped balance sheet. The deal with Qualcomm would allow the two to start working on developing energy-efficient LCD panels for smartphones using Sharp technology.

Both Intel and Qualcomm currently trade at very god valuations, but they represent two different types of stocks. Intel is an extremely large company with a market cap of $100 billion and trades for around 9 times earnings. The stock, at current levels, is yielding about 4.40% and has a book value of $9.89 per share. In my opinion, Intel is the true representation of a value stock.

Qualcomm, on the other hand, has a market cap of $109 billion and trades for around 21 times earnings. At current levels, the stock is yielding about 1.55% and has a book value of $19.65 per share. I think it is also important to mention that Qualcomm, unlike Intel, has no debt on its balance sheet. This gives the company a great deal of flexibility to expand operations or buy back stock/increase its dividend. I would classify Qualcomm as a classic example of technology growth stock.

The table below compares Intel and Qualcomm against several metrics that I feel are important when trying to assess which company is not only the stronger of the two, but also the better value.

Intel

Qualcomm

Stock Price

$20.65

$64.33

Book Value

$9.88

$19.65

P/E

9.05

21.01

Forward P/E

7.67

13.51

EPS

2.29

3.06

Market Cap

102.75 B

109.65 B

Current Dividend Rate

4.4%

1.55%

Annual Revenue

$54 B

$19.12 B

Cash on Balance Sheet

$16.99 B

$26.83 B

Long-Term Debt

$7.1 B

$0

Net Profit Margin

22.90%

25.44%

Intel is clearly the company that is late to the mobile chip party, but the bigger question regarding Intel's future is whether the company will take a path similar to that of Yahoo (YHOO). Ideally, this is where the company hires someone from the outside with experience and innovative ideas that will reinvent the company and push it to be more competitive. The other option is for the company to continue down its current path and stick to what it has traditionally done. By not moving forward with a new product line, the company would be taking a path very similar to that of Hewlett-Packard (HPQ), thus costing the shareholders a lot.

After examining both possible options, the fact that Intel's CEO himself has stated that the board is considering an outside hire and the fact that Intel has already approached Apple to move into that market, I am inclined to believe that Intel will choose to be innovative and progressive. That said, when looking at the above two firms I am more prone to be a buyer of Intel vs. Qualcomm. At first glance, that logic might not make the most sense, but there are several reasons why I like Intel better and believe that it is the better overall choice and value.

  • When doing a value comparison Intel is the clear winner from a consistent growth approach, current and future valuation, and dividend growth. I am sure that the arguments against this are that Intel currently is representing a value trap. I understand that logic and argument, but don't necessarily agree. Based on next year's EPS estimate of $2.69 per share, I feel that the stock has already put in a bottom for the year and should not go much lower than $18 per share.
  • I feel that Intel also beats Qualcomm from a steady and consistent growth standpoint. Intel has consistently beaten both its revenue and EPS numbers by 4.5%-6% each quarter for the past several quarters. Now, I will be the first to say that Qualcomm has posted some spectacular numbers and has beat its revenue targets in excess of 20% in several of the past quarters, but during last June's quarter it missed EPS estimates by 1.20%. Also, throughout this past year Qualcomm has been continually lowering its overall guidance below analysts' original estimates. As a growth stock, Qualcomm is inconsistent and tends to be much more volatile, making it very hard to assess a real valuation for the stock and to avoid overpaying.
  • Due to the fact that Intel is more of a typical value stock, the type of funds and individuals that own the stock are interested in owning the stock for the long term and are not as motivated to sell based on day-to-day fluctuations. This type of mentality creates a strong base in the stock price and creates consistency in pricing. Now, with Qualcomm being more of a growth stock, the type of investor and fund that buy this stock are more interested in short-term bursts (up or down) and are more apt to sell quicker, creating more volatility and less consistency.
  • One of the main reasons why I like Intel better than Qualcomm is the old notion of "buying when there is blood in the streets." Intel has gotten kicked down and is widely hated among the analyst community. Current price targets on the stock range from $15-$21 per share. In my opinion, it won't take a lot for Intel to do something that exceeds the market's expectations and ultimately result in a huge run-up in the share price. Qualcomm, on the other hand, has a lot to live up to and expectations are already quite high. In the case of Qualcomm, it will only take a slight miss or a little bit of bad news for the stock to sell off and correct down.

Qualcomm was surely first to the mobile chip party, but with such high expectations for it I feel as if there is greater risk in owning Qualcomm over the long run vs. Intel. Ultimately, with the amount of potential bad news that is already baked into Intel, the chance of increased value coming from even a minor amount of good news will be much higher than that of Qualcomm.

Source: A Value Comparison Between Intel And Qualcomm