I am positive about Intel (INTC) stock as I think the company has one of the strongest competitive barriers in the fast changing technology industry. The company has got a huge manufacturing lead in semiconductor manufacturing, which has given it a virtual monopoly over the PC and server processor market. The company has also invested heavily in the last two years to make an entry into the mobile processor industry, which is starting to bear fruit. The stock remains undervalued compared to the broad market indices and gives a nice dividend yield as investors remain skeptical about the company's mobile prospects. The company recently announced a new venture - Intel Media. This division will sell set top boxes for TVs and compete with a wide variety of companies like Apple (AAPL), Comcast (CMST), Netflix (NFLX) etc. While I remain highly positive about Intel's foray into the mobile devices market, I think Intel's TV entry will prove to be a dud. The company's strategy seems to have little differentiation, in a highly competitive market with very strong players. Intel has little expertise in acquiring and distributing content and I do not think it can leverage its manufacturing strength in this area. Recent data indicate that the company is being forced to pay much higher rates for content. I think Intel will fail in this business and should focus on its core business of making chips. Despite my misgivings about Intel Media, I remain highly positive about Intel's stock for many other reasons and think that it offers one of the best ways to invest in the technology space.
Why Intel's TV Foray is a Bad Idea
1. Decreases Management Bandwidth
Intel recently appointed a new CEO who has reorganized the company's organization structure to focus better on the mobile business. It is critical for Intel to succeed in the smartphone and tablet processor market, as its core PC market is starting to show a steep decline. The company has been investing heavily to win market share in the fast-growing mobile chip industry. Intel faces a strong ARM (ARMH) ecosystem that has a monopoly over the mobile market. Qualcomm (QCOM), Nvidia (NVDA) etc. are strong players that will not give an inch without a tough fight. Though Intel has a strong process lead with its leading 22 nm factories, the company will only introduce Tri-Gate 3D 22nm "Baytrail" and "Merrifield" chips in late 2013 and 2014. The company management needs to put all of its efforts to become a strong mobile player, otherwise its competitors like QCOM and ARM will become bigger and stronger. This TV entry will only make management lose focus for a small pie in a highly competitive industry.
2. Intel TV shows little differentiation
Intel has shown little differentiation in what it is going to offer with its "Intel TV" product. What we know is that Intel will provide premium offerings and will not compete in price. It will not offer anything radically new in terms of product or service. Intel has said that it will offer only premium channels to consumers and not offer complete bundles with lots of low-quality channels. The company's Unique Selling Proposition will be to offer its customers great quality content in a convenient easily accessible form.
3. Competition is Very Strong
The company will have to compete with other technology giants like Microsoft (MSFT), Google (GOOG) and Apple, which all want a piece of the lucrative TV industry. It should be pointed out that Apple, which has been wildly successful in many technology segments (mobile phones, music players, tablets), has failed in making Apple TV a success. The TV industry is tightly controlled by a small group of very powerful companies who have divided the market into regional monopolies. These companies have used their muscle to become integrated media giants controlling the whole media supply chain. These companies have shown strong stock price appreciation, even as they have been rated as the worst companies by consumer surveys. A recent NY Times story suggests that these companies are forcing content providers to charge more from Intel.
4. Power rests with Content Producers and Internet Providers
I have been negatively inclined toward Netflix stock as the company seems to be in the wrong part of the supply chain. Netflix has been suffering as it has been squeezed between content producers and the Internet providers. The company has been forced to pay for expensive exclusive content in order to compete with the likes of HBO. The Internet providers (cable companies) have managed to extract high profits as there are few alternate broadband options in the USA. Most of the media profits are being absorbed by the content producers and the cable/ dish companies. Other supply chain companies are fighting for pennies. Some companies are trying to disrupt the model but they are facing a huge legal backlash from the powerful cable lobby. I am not sure whether Intel wants to pay millions of dollars to acquire content like Amazon (AMZN) and Netflix.
Intel Corp's talks to buy content from media companies for its new TV service are advancing, and the chipmaker is offering to pay as much as 75 percent more than traditional cable rates, people familiar with the talks said.But Intel has yet to close any programming deals, said the sources, who requested anonymity because they were not authorized to comment
Source - Reuters
5. Departure of key executive does not bode well
One of the key executives of Intel Media left the company, which does not bode well for the new venture. An exciting new venture with huge growth possibilities should encourage its executives and make them put in a bigger effort. The departure indicates that all might not be going well with Intel Media.
Cisco failed twice in Consumer Technology
Intel Media reminds me of Cisco's failed efforts in entering the consumer technology market. Like Intel, Cisco wanted to expand its TAM by entering new technology segments. Cisco made two big acquisitions in the past, both of which bombed.
- Flip - Cisco first bought the producer of Flip camcorders, which had revolutionized the camcorder market with its small size and excellent video quality. However, the company failed to sustain the momentum and Cisco ultimately stopped selling the product.
- Linksys - Cisco entered the home router segment by buying Linksys; however the company failed to make any headway here as well. The home router industry has not seen much innovation and Cisco had a golden opportunity to occupy a large growing niche in consumer homes. The company could have used routers to provide other services such as storage, backup, energy management etc. But the company failed here as well and was forced to sell Linksys.
Stock Performance and Valuation
Intel's stock has started to consolidate at the ~$25 level after climbing from the low $20, as the company bagged some big design wins from Samsung and Lenovo. The company is still quite cheap in my view with a forward P/E of ~12x and a divided yield of 3.5%. Unlike the other large technology companies, Intel does not hoard cash and returns most of its huge free cash flows in the form of buybacks and dividends.
Intel possesses massive advantages in manufacturing, which is not well understood by the market. The company's newest 22 nm fabs are now starting to produce cutting-edge products like Haswell chips. I think that Intel will be successful in winning a huge piece of the mobile processor market share. However, Intel's TV entry seems pretty ill advised in my view. I cannot see any big differentiation in what Intel will bring to the table and competition seems quite high. The company has not spent too much money on this TV venture till now and I think that Intel needs to seriously re-examine if it makes sense to go ahead. I think Intel is well placed with its manufacturing leadership to take a big share of the mobile processor market. Trying to get into the consumer technology space does not make much sense in my view. Cisco (CSCO), which is another technology manufacturing giant that has failed miserably with its consumer technology products. Cisco had to sell both of its consumer technology acquisitions (Flip, Linksys) for a large loss after failing to understand the consumer technology markets. Intel should learn from Cisco and stop entering consumer technology.