Intel (NASDAQ:INTC) is undeniably the world's largest semiconductor company based on both market capitalization and annual revenue. The company has controlled the chip-making sector for as long as the personal computer market has existed. But despite being unmatched in size and strength, the picture doesn't look as rosy for the shareholders. Since the second half of 2012, its stock has plummeted from a 5-year high of $29 to a meager $20 valuation. This is on the back of poor reported EPS due to slow revenue growth cannibalized by smartphone and tablet sales.
Facing Woes Due to Mobile Computing Shift
Consumer demand for new PCs has been lackluster in recent years as all eyes are turning to mobile computing devices. Touch-enabled smartphones and tablets are all the rage nowadays. These devices use low-power chips, in which Intel does not have significant presence. Meanwhile, mobile-centric companies have been raking in profits several times over in recent years. It might be argued that Intel has missed the mobile boat and may be in its sunset years of global dominance.
It is not just Intel missing the mobile revolution. Top global PC makers Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HP) have been in dire straits as of late. Dell has just started a controversial transition into becoming a private company fueled by its rapidly declining price. Meanwhile, HP has had some recent boardroom debacles and failed to break into the mobile market with webOS.
Transitioning into the mobile market by diversifying product lines has proven to be difficult even for these giant PC companies. It would be easy to surmise that Intel would similarly suffer especially with the uncertain fate of two of its loyal partners.
Enterprise leader Cisco (NASDAQ:CSCO) has been reporting slowdowns in its own domain, which correlates with Intel's weakening data center revenues. IBM Corp. (NYSE:IBM) has also long jettisoned its PC hardware division and focused more on delivering IT solutions to the enterprise market.
Meanwhile, mobile-centric semiconductor and device manufacturers like ARM Holdings (NASDAQ:ARMH), and Qualcomm (NASDAQ:QCOM) have been riding the aggressive mobile computing trend. Taiwan Semiconductor Manufacturing (NYSE:TSM) alone supplied 50% of the global foundry market share in 2011. It is also outspending Intel in building new fabrication facilities, indicating even further growth in demand for new mobile devices.
Intel has been taking recent action to counteract overstocked inventory issues, which accumulated during late 2012. Its manufacturing utilization has been ramped down to roughly 50% further indicating the worrying trend in the PC industry.
Notwithstanding the unfavorable PC market, Intel still trumps its rivals with cutting-edge engineering design and fabrication technology. The first 22nm chips in the market will soon be released by the company along with a mobile variant.
Intel's long-time rival Advanced Micro Devices (NASDAQ:AMD) has also been developing new platforms for mobile applications with its eyes on pricier Windows tablets. While it lost the standard microchip battle to Intel, AMD managed to survive in the PC market by catering to niche markets like desktop gaming and lower-cost segments. Its budget-oriented advanced processing unit [APU] has found itself a niche market. Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) will be using Fusion APU variants for the next-gen Xbox 720 and PlayStation 4. Plans to release ARM-based lower power servers may also be a positive development for the company if the market exists.
A significant majority of the PC market still proudly bears the Intel badge though. Even Apple's (NASDAQ:AAPL) wildly popular desktop and laptop models continue to rely on Intel chips' performance advantage. Meanwhile, customers happily pay the premium for the best that money can offer. In fact, system sales have even increased ever since Apple switched to Intel's chips.
Despite being responsible for the smartphone and tablet revolution, Apple has also begun to feel the pressure from Google's (NASDAQ:GOOG) Android. The open-source mobile OS now outnumbers iOS devices two to one with no signs of slowing.
A company to watch out for in these times would be Samsung (OTC:SSNLF). Aside from leading mobile device sales it also supplies chips and components to the rest of the industry. Even Apple uses Samsung fabs for its ARM-based chips. It will also be allotting $7 billion for its Xian wafer fabrication plant. It makes much more revenue from selling the entire device compared to just the chip. Samsung is also one of the few companies with enough liquidity to stake a claim on Intel's manufacturing throne. Meanwhile, Intel is in very strong consideration as Apple's next chip supplier for its designs.
Intel's counterpart in the mobile realm is ARM holdings. It sells mobile CPU and GPU designs to firms like Apple, and Qualcomm, which then design SoC platforms. It does little else to be able to sustain its leadership of the market. While many other current and potential competitors, aside from Intel, are also interested in ARM's stake in mobile. ARM would be in a bad position if only even one competitor took a chunk of its IP revenues.
Looking into Intel's Recent Moves:
In 2012 Intel increased its R&D budget to $10 billion, a substantial 25% increase over 2011. It also enjoys the support and partnership of other notable tech giants like Google, Microsoft and Lenovo in its near-term road map.
Intel already has plans to build more fabrication facilities in 2013 and beyond, second only to TSM. The entire semiconductor industry is expecting fab construction spending to quadruple in the next few years. Even its strongest competitors however will have to significantly outspend Intel to even begin to catch up to its technology prowess.
In 2010, it purchased McAfee allowing it to bolster its own chip designs with more integrated security features. Mobile and wireless innovation is also an important direction in Intel's plans. It acquired Infineon Wireless in 2011 and added more R&D capacity for modems and low power platforms for mobile applications.
Intel is also opening its doors to providing fabrication services for other semiconductor design firms. Companies will jump at the chance to integrate Intel's advanced fab technologies into their products to set them apart. This should be more than enough to fill the chip manufacturing utilization gap from declining notebook, netbook and PC sales. Intel CFO Stacy Smith expects that its capacity utilization rate will easily reach 90% with more room for growth.
What Could Future Bring for Intel?
Intel still leads other foundries and semiconductor companies by a large margin. Intel has a clear technological and manufacturing edge against competitors. It has a strong footprint in its core markets and doesn't have to fear being overtaken soon. Its competitors would have to make a significant dent in Intel's market territory. At the same time, they would also have to stay ahead of Intel's future mobile offerings. Even if mobile devices have cannibalized Intel's traditional sales, these have yet to replace PCs as true business productivity machines.
Intel also has a strong management team behind it. Most of its top level managers have been lifelong Intel employees. Many have been with the company through its trying times and know what it takes to come out on top. Intel also has a knack for marketing and winning customers. Its brand image is enough to dominate the home and enterprise computer market. The company's financials are also very sound with steadily increasing gross margins for the past decade.
Surely, there are other more attractive stocks if you are keen on riding the trends in mobile computing. However, Intel is an attractive long play with solid fundamentals. The stock is trading at a single-digit trailing P/E ratio. It also pays out a healthy dividend yield with a low payout ratio, which makes it a great one for an income-oriented portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.