When it comes to large cap technology stocks, the most bearish sentiment seems to be around shares of chip giant Intel (INTC). The company's growth plan in recent years has fallen apart, with revenues declining and earnings plunging. A struggling PC market is the primary reason for Intel's struggles, along with the company's inability to show up to the mobile revolution on time. Today, I'm here to look at the negativity around Intel again, and detail why Intel's short interest hit another new high in the middle of October.
Another short interest high:
For those that have followed my "rising and falling short interest" series, you know that Intel has been on the rising list several times. Why is that? Well, from the chart below, you can see how Intel's short interest has soared over the past 18 months.
There has been a three level increase in short interest. What does that mean? Well, the first level is short interest itself. At the mid-October update, Intel's short interest was roughly 255.3 million shares. As you saw in the chart above, that's an 18 month high. Short interest in the chip giant is up 40% over the past year and 188% over the past 18 months. That's level one.
The second level is the days to cover ratio. This ratio tells you how many days it would take all shares short to be covered, based on the average trading volume of the stock. A year ago, Intel's days to cover ratio was in the 3-5 range, meaning it would take all short sellers three to five days to cover. A days to cover ratio of 3 to 5 generally isn't high for the "average" stock. However, when it comes to large cap technology names, it is. Over the past year, names like Microsoft (MSFT), Apple (AAPL), Cisco Systems (CSCO), and Google (GOOG) have seen their ratios in the 1-3 area, for the entire year.
In four of the past five updates, Intel's days to cover ratio has been higher than 8.30. That's about twice what it was a year ago, and the year ago number was high to begin with. It is logical that the days to cover ratio would rise if short interest is increasing. However, Intel's short interest is only up 40% over the past year. Intel's volume is down about a third or so against the same time period last year. That's when shares were fairly volatile after Intel's big Q3 warning.
The third level is that Intel's share count is coming down. Intel is buying back stock, and although the buyback has slowed, the share count is down from 5.006 billion to 4.973 billion over the past 18 months and 5.511 billion at the end of the 2010 fiscal year. Since I started tracking Intel short interest, the percentage of shares short (against the outstanding share count) has risen from about 1.77% to 5.13%. A little more than 5% of shares short is not a large number, but it is the trend that is bothersome.
Why is this happening?
I mentioned some of the reasons why in my opening. A weak PC market hurt initially, and Intel not getting into tablets right away is a bit frustrating. For Intel, 2012 was supposed to be a big year. When that didn't happen, 2013 became the year for growth. That isn't going to happen, as Intel proved again with its recent earnings report. Now, investors are holding hope for 2014, but estimates for 2014 have already been sliced and diced tremendously. The following table shows how 2014 estimates have fared, with no changes since 10/24.
*Growth numbers for 2014 are based on the 2013 estimate at that point. As the 2013 numbers have changed, that will impact the growth number for 2014 estimates at the same revenue/earnings level.
You can see how analyst estimates have dropped. Remember, Intel set a yearly revenue record in 2011 with $53.999 billion. Current estimates for 2014 don't have them reaching that level. It would be a shame for a company of Intel's size to go through a three year period like that. On the earnings side, the picture is even worse. Intel reported earnings per share of $2.39 in 2011. Remember, that's with the higher share count. Net income is falling at an even faster pace. Investors are also worried about Intel's capital return plan. There was no dividend increase this year, which has more than a few worried. Intel has also significantly slowed down the buyback in 2013. Both of those can be contributed to cash flow, which obviously will be hit when net income is down by more than $3 billion over the past two years.
Apple earnings - good and bad:
Late last week, I discussed Intel's 2014 being doomed if the chip giant couldn't get more involved with Apple. Obviously, getting chips into the iPad or iPhone would help on the revenue front, where Intel needs the most help right now. But I also mentioned how it would help Intel in terms of perception. Getting into the iPad would help shed the whole "PC" image for Intel, which is dragging down the chip giant. Yes, Intel has gotten Haswell into Microsoft's Surface Pro 2 tablet, but the Surface is a long way away from being an iPad killer. Additionally, it seems that Intel's 64-bit weapon is a few quarters away.
The problem for Intel, and Microsoft too, is that Apple's iPad is doing even better than most people thought. Apple reported its earnings earlier this week, and the company did extremely well. The iPad actually saw a year-over-year increase in unit sales. This might not seem surprising, given that the iPad mini did not exist in last year's fiscal Q4 for Apple. However, Apple launched these tablets last October, so they've been on sale for almost a year now. The fact that Apple was able to sell 14 million iPads in fiscal Q4, many months after the original launch and right before a tremendous refresh, shows you how powerful the iPad brand is. The new iPad line looks even better, and will definitely destroy any other tablet offerings this holiday season. This is why Intel needs to get into the iPad, and maybe the iPhone down the road. Until Intel gets into the iPad, I fear it will keep its "PC" image, and that will hurt sales. You already are seeing how revenue estimates have been whacked.
There was a small positive though in Apple's report for Intel. Sales of Apple's Mac line came in well above analyst expectations. A stronger PC line would be positive for Intel. However, Mac revenues accounted for just $5.6 billion of Apple's nearly $32 billion in product revenues. The iPad, in its weakest quarter of the fiscal year, had $562 million more in revenues than the Mac line. It's a positive for Intel that Mac sales are doing well, but it's a small victory in a much larger war that Intel is losing.
Intel's short interest hit another new high in the middle of October. That probably shouldn't be a surprise, as Intel's growth story hopes continue to fade. Revenue and earnings estimates continue to fade, and Intel is late to the mobile revolution. Apple's strong quarter will help keep Intel as a second class citizen in the tablet space for the time being. Now, Intel shares are up 4.83% since the company's earnings report two weeks ago. However, since the NASDAQ 100 ETF, the PowerShares QQQ (QQQ) is up 4.50%, Intel really has just performed with the market. With expectations coming down, Intel is being propped up by the market, but I don't think it will last. Intel is about to push up against some technical resistance, its upper Bollinger band, which you can see in the chart below. If Intel shares approach $25 on the Fed meeting and continued QE, a short position may be warranted here. When the market pulls back, I think Intel is most vulnerable as the growth story has not played out as hoped. That's why short interest has nearly tripled in the past 18 months.
(Source: Yahoo! Finance)
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