This Year's Results
Intel (INTC) reported its Q4 and full-year 2012 results after the close on 1/17. The Street had expected the following results:
Revenues: $13.53B with a range of $13.00B - $13.89B
Q4 EPS: $0.45 with a range of $0.36 - $0.50
2012 EPS: $2.10
The company ended up reporting $13.5B, a slight miss from the expectation and below the midpoint of the guided range issued at the last call of $13.6B. The company also reported EPS of $2.13, above the analyst expectations. The "beat" on the EPS line is due to a combination of fairly aggressive share buybacks in addition to a better-than-feared gross margin profile.
Full year revenue was $53.3B, down 1% from $54B in 2011. Net income was down mostly due to a heavy increase in R&D spending in addition to soft gross margins in Q4 due to the excess capacity charges.
The year wasn't that great, but it's hardly the armageddon that many would have guessed.
Q1 + Full Year 2013 Guidance...Not Great
Q1 is expected to be, at the midpoint, $12.7B, down 6% Y/Y. The broader decline from Q4 is due to seasonality. Gross margin is expected to be 59%: excess capacity charges go down, but startup costs related to the 14nm node go up, giving us flat margins Q/Q.
The full year is cited at "low single digit" revenue growth, meaning 1-4% growth or revenues of $53.83B - $55.4B. Analyst consensus was $54.3B, so the midpoint of the guidance is just about in line with the analyst expectations.
Anyway, that's it for the numbers recap. Here are my thoughts on what's going on.
Technology Lead Will Be Maintained
From a longer-term perspective, it is good to see that Intel is aggressively staying the course on its R&D, capex, and so forth. While in the near term a Y/Y increase during 2013 in capex and R&D doesn't look all that good in terms of making EPS look nice, especially in light of the apparently light forecasted Y/Y revenue growth, it's critical that Intel keeps its advantages. Ultimately, the ability to manufacture -- in large volume -- the best SoCs and processors will lead to leadership in new areas of computing at the best cost.
And enough discussions have taken place with enough customers with large requirements to lead us to believe that in both its first and second year of production, in both the first and second year production of 20 SoC and that first year will be next year, 2014.
Further, CEO Morris Chang had this to say with respect to the 20nm node:
Now, a few words on 20-nanometer and 16 FinFET. Both technologies are in progress in R&D. Both represent state of the art, leading-edge technology not just in foundry but in the whole SC industry.
20nm planar is still in R&D phase. This means that these devices won't be shipping in volume at the beginning of 2014 (when Intel will be shipping 14nm second generation FinFET products), but instead in the second half of 2014, similar to what we saw with the 28nm launch in "2011".
In a nutshell, this means that Intel can produce higher performance, lower power, and cheaper-to-manufacture products than any of the competition in any field, and it will only continue to widen that lead. Investors cannot afford to lose sight of how critical it is to have the best transistor technology in massive scale.
Tablets? Yes! Smartphones? Not Really
Intel will have a leadership position in tablets. The 22nm "Bay Trail" platform is scheduled to be released in 2H 2013 where it will compete with 28nm designs from Qualcomm (QCOM), Nvidia (NVDA), Samsung (SSNLF.PK), and others. Intel is also bringing "Bay Trail" to Android, so in addition to having a near monopoly on Windows 8 tablets (AMD (AMD) is throwing its hat into the ring here, too), it will encroach onto the Android tablet space. This is in addition to the "Ultrabook convertible" initiative in which the higher end "Core" series of products is expected to play in the high end of the tablet space while offering substantially more performance than either the best Atoms or the best products from the ARM (ARMH) camp.
However, in the phone space, Intel still needs to keep pushing in order to see US based design wins. The apps processor part of the equation is not the problem -- having an ARM license wouldn't really "help" and would probably actually be a significant detriment since Intel can do better. The problem here is with the Infineon division. Intel's LTE solution won't really be ready until later in 2013, which means that LTE-enabled phones won't be announced until Mobile World Congress 2014.
The Stock: Some Thoughts
It's pretty clear that Intel has been a terrible investment over the last 6 months or so. People are so fixated on Intel "missing" mobile that they conveniently ignore the following facts:
- Datacenter (high margin, high ASP, growing units) will be a major force in driving top and bottom line growth, especially at 50% operating margin
- The PC industry, as the "PC" and "Tablet" segments merge will become a source of nice growth for Intel in the long run
- The manufacturing lead will likely lead to lucrative small foundry deals that take care of any "excess capacity" that comes up in the future
That being said, in the near term, things don't look good for the stock, and I believe that new investors should either sell puts ($20 - $21 strike) or wait for the stock to break the $21 level to start scaling into a position. The sentiment is likely going to be sour around Intel and the PC space in general for the next week or two, so at the very least, exercise extreme caution in establishing a position.
In the longer term (1-2 years out), Intel will be fine -- the foundation that the company is laying today will pay off very nicely in the future, and it is still important to note that Intel is still the most profitable semiconductor company on the planet. However, for those of you with shorter-term expectations, I would not recommend buying shares today with the expectation of a large bounce over the next week or two. The knife could still very well continue "falling," so it is absolutely critical that if you're buying the stock, you're buying it with the expectation that things don't get "really good" until 2H 2013.
If you are tempted to try catching the knife, do either one of the following:
- Sell puts at a good entry point a couple of months out. Best case, you get to collect the premium and are not assigned the shares. Worst case, you get the shares at strike - premium.
- Wait for the downgrades to come in, and start buying on each "leg down." Under $21 is a great place to start building a position, and at $19, the dividend yield is great AND the stock has strong multi-year support at that level.
However, keep in mind that sentiment around the stock will be ugly, and so the stock may be prone to miss out on many broader rallies.
Additional disclosure: I am long $ARMH puts