The expected demise of the PC is threatening the long-term viability of Intel (NASDAQ: INTC), the largest traditional chipmaker in the semiconductor industry. Is Intel stock still an asset or a liability to your investment portfolio?
Intel's Failed Bet
With the release of Windows 8 last year, Intel was hoping that the PC would enjoy a short-term reprieve and, in the process, earn it extra revenue. Unfortunately, despite reportedly selling some 100 million units, the combined PC and tablet operating system is generally recognized by analysts as a failure, sparking widespread dissatisfaction among customers. In response, Microsoft (NASDAQ: MSFT) released an update, code-named Blue, that addressed many of the problems users had with it including making the tile-based user interface easier to use on computers without touch screens.
Windows 8 has also been blamed for the falling global sales of PCs, which declined nearly 14% for the first quarter of the year, the worst recorded since data provider IDC started tracking the PC market in 1994. For the U.S. market alone, the news was just as bad, with PC sales contracting year-on-year to nearly 13%, the lowest recorded since the first quarter of 2006.
Due to the failure of Windows 8, Intel failed to reverse its fortunes, as its revenues fell by 2.5% in the first quarter, the third consecutive quarter to record declining revenues. And analysts are predicting that revenues would fall again in the current quarter, by 4.5 percent.
The ongoing decline in revenues was attributed to declining PC chip sales. As of 2012, the division accounted for some 65% of the company's total revenue and 90% of its operating income. Further stoking investors' pessimism over Intel is the fact that the company seems to have no backup plan to deal with the failure of Windows 8.
Why You Shouldn't Write Off Intel
However, you shouldn't write off Intel just yet, for a number of reasons:
Intel has the expertise to be able to catch up with its competitors on mobile chip design. In fact, in its fourth-quarter 2012 earnings report, the company reported that it was allocating $13 billion for capital investment in 2013, $2 billion higher than the capex it reported in 2012. Analysts interpret this as a sign that the chipmaker is planning to make major investments in new technology.
Intel chips are still in demand in other sectors, such as servers, which run the company's Xeon chips. In fact, with the increasing shift toward cloud storage, the demand for servers is expected to be stronger than ever, which could provide a growth opportunity for Intel.
There is still demand for PCs. Some analysts have pointed out that while the sales of PCs and laptops are not as strong as they used to be in past years, they aren't crashing either. Many offices still buy and use PCs, and many individuals prefer the tactile feel of a keyboard over typing on a touch screen. Many professional programmers and artists also need PCs that run advanced software rather than using apps.
Intel also has a secret weapon that could help turn the tide in Intel's favor: the Haswell Chip. This fourth-generation Core Processor chip is expected to have double the 3-D performance of its past generation of Ivy Bridge chips. In addition, it also has other improvements such as more efficient power usage and longer life. This means that more tablet makers could be using the chip in their devices, particularly those that are aimed at gamers and people who watch movies on their tablets.
The Bottom Line
Although falling PC sales seem to threaten Intel's long-term prospects, it is too soon to consider the chipmaker down and out. It still has the resources to invest heavily in research and development for a new generation of processors that will run on tablets and other mobile devices such as smartphones. This means that Intel is a good stock for your long-term portfolio, as the new products in its pipeline will surely prove its viability.
However, analysts advise those wanting to buy in to wait, as Intel's stock price is sure to take another hit as more bad news about Windows 8 trickles in and investors can get the stock at a bargain.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.