The world's largest manufacturer of semiconductor products, Intel (INTC), is preparing to launch its cloud-based web TV service and set-top box. The company intends to roll out the web TV service city by city while it works out deals with content providers. Intel is currently trading at price multiples that are not reasonable for profitable investing. The growth prospects surrounding its web TV service may improve its price multiples and make it a more attractive investment. In this article, I will explain how the web TV project will boost the long-term value of Intel and transform the company into a highly specialized chip maker for next generation consumer products.
Why is Intel experiencing slow sales growth?
According to research firms IDC and Gartner, the PC industry was weak in 2012 and is expected to remain weak in 2013 due to the softness in the memory market. The decline in the DRAM market, the ongoing eurozone debt crisis, and weak PC demand are blamed for Intel's poor performance in the past few quarters. In order to improve its bottom line, Intel has increased efforts to move beyond the computer industry.
Intel reported revenues of $13.5 billion in the third quarter of 2012, which are flat when compared to the $13.5 billion recorded in the second quarter of 2012. Intel reported operating income of $3.8 billion for the third quarter 2012, also flat compared with $3.8 billion reported in the second quarter. Intel's earnings per share (EPS) rose 7.4% to $0.58 compared to $0.54 for the second quarter. But, data center group revenue was $2.7 billion, down 5% sequentially. Its architecture group revenue was $1.2 billion, down 14% year-over-year.
"Our third quarter reflected a continuing tough economic environment," said Paul Otellini, Intel's president and CEO. "The world of computing is in the midst of a period of breakthrough innovation and creativity."
Over the past year, Intel has initiated several new programs to boost sales growth. In a bid to tighten and hone its mobile technology focus, Intel reorganized several business units to form a new mobile and communications group that will be responsible for the firm's smartphone, tablet, and wireless communication efforts. The company separated the former netbook and tablet group into the netbook group, tablet group, and service provider group.
If we compare the company's initiatives to the last two financial statements, it is clear that with the effort, Intel has not achieved profitability in comparison to its 2011 performance. In addition, earnings have been flat year-over-year. Intel is not operating at an efficient level.
According to its fourth quarter guidance, Intel hopes to generate $13.6 billion, compared to $13.5 billion reported for the third quarter 2012. It projects a gross margin of between 57% and 58%, down from 63.3% for the third quarter of 2012.
Let's check how Intel is performing compared with the rest of the companies. With EPS at 2.29, compared to 13.91 for IBM (IBM) and 3.61 for Accenture (ACN), and a gross margin at 0.64%, compared with 0.95% for ARM Holdings (ARMH) and 0.75% for Microsoft (MSFT), Intel does not appear to be ahead of others. Apart from that, its operating income, net income, and revenues year-over-year have not been impressive enough to persuade investors the company is on the way to profitability anytime soon. Looking at Intel's previous efforts and worsening margins, Intel needs to be successful in the web TV project.
The web TV project will enable Intel to redefine itself and prepare for a post-silicon future. The web TV service could become a key blueprint for Intel's future. The company will focus on goods and services tailored directly toward consumers as opposed to powering devices made by others. It is noticeable the web TV project is the first foray into the sector. It is understandable that is one of the fast-evolving markets now, and gaining a foothold is good for Intel. Investors should watch Intel closely and be prepared to buy on positive news surrounding its web TV project.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.