Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) will be forever linked as the twin engines driving the PC market. On October 26, 2012, Microsoft unveiled its much-anticipated Windows 8 operating system, as the first major launch in three years since the debut of Windows 7. Microsoft engineers designed the Windows 8 operating system as a fusion between traditional smartphone, tablet, and personal computer interfaces. As such, Windows 8 was mostly notable for its conspicuous lack of the standard Start Menu against a backdrop of touch screen tile prompts. Over the past year, however, legions of critics have fingered Windows 8 as the ultimate villain behind the steady deterioration of the PC market. Weak PC sales, of course, do not bode well for the likes of Intel and its shareholders.
Enter Windows 8.1. Windows 8.1 is set to hit retail shelves on October 18, 2013, nearly one year after the initial Windows 8 launch. The timing of this Windows 8.1 release is a change of pace for Microsoft. Rather than attempting to reinvent the operating system wheel, Microsoft has effectively accelerated the process of innovation behind a series of relatively rapid-fire upgrades designed to accommodate consumer demand. Windows 8.1 software is available free of charge to users who have already purchased Windows 8. In effect, Windows 8.1 is a bolt-on product. As such, this latest release out of Redmond will fail to reverse ongoing consumer electronics trends. Intel investors must also calculate that the recent embrace of mobile out of both companies will not make up for the secular decline in PC sales. Intel is still a strong sell.
Windows 8.1 Features
In November 2012, Steven Sinofsky abruptly announced his resignation as Windows President, after punching the clock at Microsoft for twenty-three years. On August 23, 2013, CEO Steve Ballmer followed up this news by declaring that he would also retire within the next twelve months. A Microsoft bear would argue that the failure of Windows 8 was the catalyst that made heads roll at Redmond. The accelerated launch of Windows 8.1 will prove to be a patchwork attempt to repair the damage.
Brad Chacos and PC World have gone on to label Windows 8.1 as "The Great Compromise" above the "sink or swim" Windows 8. The Windows 8.1 compromise thesis stipulated that the new operating system will be more so accommodating to traditional personal computer users, rather than forcing these loyalists into tablet-like systems. Most notably, Windows 8.1 allows for boot-to-desktop through its Taskbar and Navigation properties. The PC standard Shut Down option has also been brought back through the updated Power User menu. Beyond boot-to-desktop, Windows 8.1 has been praised for its more logical transitions and help icons at particular bottlenecks. Bing Smart Search integrates and presents data from application, desktop file, and Internet sources.
Computer geeks, of course, will wrangle over the reintroduction of Start. The Windows 8.1 Start button is a gateway back into the modern, or tablet/desktop hybrid interface, as opposed to the traditional PC Start Menu, which offered shortcuts into the most popular programs. Ironically, numerous applications have already emerged to remove the new Start button from the Windows 8.1 interface. Perhaps the same group of critics who lobbied for the return of the Start Menu is also behind the Start button work-around.
The Personal Computer Market
According to New Market Share data, Windows operated more than 90% of the desktop market through August 2013. Multiple reports have indicated that Windows 8 sales lagged far behind those of the much-maligned Vista, at similar points within the early stages of both product life cycles. Only recently has Windows 8 (7.41%) surpassed Windows Vista (4.11%), in terms of desktop market share percentages and adoption. Taken together, Windows 7 and Windows XP systems operated a combined 79% of the August 2013 desktop market. The statistical data may serve as evidence that users have preferred to maintain older personal computer machines, instead of upgrading to Windows 8. Intel investors must recognize the idea that Windows 8 has done nothing to reinvigorate demand for the personal computer.
On July 10, 2013, research firm Gartner released estimates of the size and scope of the global PC market during the second calendar quarter of the year. For this time frame, Gartner presented estimates of 76 million PC unit shipments, which was a 10.9% decrease compared to the year-over-year period. Global PC shipments have declined for five straight quarters. On August 7, 2013, Gartner followed up this anemic global PC sales report with even more dire news out of Western Europe. Gartner reported that the Western European personal computer consumer market collapsed by 25.8% during Q2 2013. The PC market is swinging through the maturity stage towards decline, in conjunction with uneventful product launches out of Microsoft. Meike Escherich, Gartner's principal research analyst, recently claimed that the looming Windows 8.1 and Intel Haswell processor updates would not "fully compensate for the ongoing PC decline." Gartner officials have argued that consumer behavior has shifted towards the embrace of tablet computing, at the expense of personal computer sales.
Intel bulls, of course, may argue that the chipmaker can make up for any slack in PC production through growth in mobile chip sales. Between 2011 and 2012, Intel did amp up research and development spending from $8.4 billion to $10.1 billion, despite the fact that revenue did decline slightly during this time frame. The aggressive R&D spending does confirm Intel's commitment to build out its share of the mobile space. For Intel, however, mobile may be described as a "lose - lose" situation. First, Intel is a "fast follower" behind both Qualcomm (NASDAQ:QCOM) and ARM (NASDAQ:ARMH). Secondly, mobile chips are coveted for their energy efficiency and cool temperatures, instead of raw processing power. For Intel, real success in mobile would call for mass volume in order to cover the fixed costs of its foundries. Heavy mobile chip volume at Intel, however, would effectively subtract resources away from its more profitable PC semiconductor lines.
The Bottom Line
On September 27, 2013, Intel closed out the trading session at $22.98 per share. Wall Street traders then slapped a $115 billion market capitalization price tag upon Intel. On paper, this performance does calculate out to what appears to be a cheap ten times trailing earnings. Throughout 2013, however, Intel has fallen far short of earnings expectations telegraphed out of Wall Street analysts. Most likely, Intel will stagger to the 2013 finish line having collected $8 billion in net income. In actuality, Intel is therefore actually trading for a relatively expensive fifteen times earnings. As such, Intel stock should be immediately sold.
Intel classifies its businesses according to PC Client, Data Center, Software and Services, and Other Intel Architecture operating segments. Other Intel Architecture is an umbrella categorization above mobile chip technologies. Other Intel Architecture has only accounted for between 7% and 9% of total annual revenue over the course of the past three years. Alternatively, the PC Client grouping has historically driven roughly two-thirds of total net sales at Intel.
Again, Windows 8.1 will not rescue the personal computer market from its ongoing free fall. At best, Intel will continue to generate mountains of operational cash flow, while failing to achieve real growth. Ironically, Intel is a victim of the Law of Large Numbers working in tandem with Moore's Law. Moore's Law stated that the number of working transistors that may fit upon one particular integrated circuit would double approximately every other year. Intel ignored Moore's Law and missed the mobile boat. Windows 8.1 is no life raft.
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.