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Investors in Intel Corporation (INTC) were disappointed following last week's investor meeting. After the meeting, analysts were getting cautious on the prospects for the firm.

Intel's reliance on personal computer sales and a lack of a meaningful presence in mobile devices and tablets is a big worry for investors. Given that these developments will only really become visible next year, I remain cautious and stay on the sidelines.

Analysts Become More Cautious

Doug Freedman, analyst at RBC Capital cut his recommendation on Intel from "Outperform" to "Sector Perform." He cut the price target by a dollar to $26 per share, suggesting some 9% upside from current levels.

Freedman was looking for a greater focus on return on investment and a better ultra mobile execution, following the analyst day last week. He calls for a much needed strategy change as soon as possible. Intel's market entrance into the tablet market offer less attractive solutions, while return on investments on these new entrances are not supported by the opportunity.

The only reason for the cautiously optimistic stance is that headwinds have been visible, and Wall Street has already priced these difficult circumstances into the price to a large degree. Note that analysts are still very much divided about Intel's prospects. Some 17 analysts run a "Buy" or "Overweight" rating while 9 analysts run

Freedman furthermore notes that Intel does not have a large analog IP library on leading edge process nodes. This is a hurdle to foundry revenues and success in mobile markets. Furthermore PC refresh issues remain unanswered.

Investor Meeting

Last week, Intel held its investor meeting. Intel recognizes the tremendous changes over the past few years. Computing units have exploded and all this growth came from mobile and tablets, as PCs are declining. Yet Intel has no strong market position in these new areas such as mobile phones and tablets. The fact that management has largely ignored these upcoming developments has already resulted in a lot of frustration with investors.

The PC Client Group generates the vast majority of revenues of $32.7 billion in 2013, down 5% on the year before. Despite the issues it remains very profitable with operating earnings of $11.6 billion, for 35% margins. The Bay Trail Celeron and Broxton Celeron introductions in 2014 and 2015 are set to aggressively cut platform costs by 30% and 37%, respectively. Despite a modest drop in revenues for 2014, operating earnings should come in flat.

The shocker over the past year has been the other Architecture business reporting revenues of $4.0 billion, down 8% on the year before, while posting a huge $2.5 billion operating loss. For 2014, Intel sees tablet sales quadruple compared to 2013, yet operating losses are seen up again. Total revenues for the architecture business are seen flat. This prediction alone is a huge shocker for investors who receive very poor returns on these investments, while they don't offer any real prospects to become a growth driver in the future.

The data center group might be Intel's best performing business. Revenues for 2013 were up by 9% to $11.5 billion as operating income totaled $5.3 billion, for incredible operating margins of 47%. For 2014, Intel sees low to mid-teen growth in revenues with further margin expansion, boding well for earnings.

The software and services group reported revenues of $2.5 billion in 2013, while reporting flat operating results. McAfee is gaining market share, as revenues are set to increase in 2014 accompanied by modest earnings.

Valuation

Intel ended its third quarter with $19.1 billion in cash, equivalents, and short-term investments. Total debt stands at $13.5 billion, for a modest net cash position of $5.6 billion. Note that Intel furthermore holds $8.1 billion in marketable equity securities and other long-term investments. I excluded these investments in the net cash position calculation as they generate income as well for Intel.

Revenues for the first nine months of 2013 came in at $38.9 billion, down 2.5% on the year before. Net earnings fell by 18.1% to $7.0 billion. Full year revenues are seen around $52.6 billion as earnings could come in around $9.5 billion.

Trading at $24 per share, the market values Intel at $119 billion. This values operating assets of the firm at $113 billion. As such, operating assets are valued at 2.1 times annual revenues and 12 times earnings.

Intel currently pays a quarterly dividend of $0.225 per share, for an annual dividend yield of 3.8%.

Some Historical Perspective

Investors in Intel have seen poor returns over the past decade. Shares traded as high as $30 in 2004, but have ever since mostly traded in a $15-$25 trading range. Shares are obviously still far removed from all time high in the $70s during the internet bubble, currently trading at $24 per share.

Between 2009 and 2012, Intel has increased its annual revenues by roughly 50% to $53.3 billion. Earnings rose to $11 billion in the meantime after peaking at $13 billion in 2011. Note that Intel did retire roughly 10% of its shares outstanding in the meantime.

Investment Thesis

Investors were not too pleased with the investor meeting of last week, sending shares about a dollar lower last week.

The headline numbers were little ambitious. For 2014, overall revenues and operating earnings are seen flat, while gross margins are seen at the midpoint of their long-term guidance, around 60%. The only promising areas are the continued growth in the data center and the much-anticipated releases for the PC group as well as tablets.

To put down nerves among investors, Intel remains committed to pay out 40% of free cash flows available through dividends, while using additional cash to possibly repurchase shares.

The good thing is that Intel appears to be waking up, taking the stagnation and impact on earnings seriously. The company came up with its Intel TV plan at the start of this year, to create a superior entertainment package. This initiative never took off and now CEO Krzanich recognizes that the company can no longer afford the distraction and expenses related to this initiative. Verizon Communications (VZ) is a rumored buyer for the business with Intel reportedly asking $500 million for the unit.

It is a positive sign that within a year's time after Intel decided to launch the project, it will take its loss and stop development of the unit. While Intel is aggressive in cutting losses in this unit, it still expects increasing losses in its Architecture unit, the umbrella focusing on tablets, netbooks and smartphone chips. And of course the PC is not dead yet, with notably the business market still being hooked to personal computers. In the past quarter, 62% of total revenues were achieved in the PC Client Group, while another 22% of revenues were being generated in the Data Center Group.

Furthermore, Intel still has potential given the lower cost curves and strong market leadership. Despite this, Intel will undoubtedly continue to face long-term headwinds, until it can successfully penetrate into a long-term growth area.

To boost its market shares in the tablet market, Intel will push for the Bay Trail to be implemented in the high, to even the low-end of its products range. While this will be undoubtedly costly, the company appears desperate to achieve market share gains in the area, important to regain credibility in the long term.

Back in October, when Intel released its third quarter results, I last took a look at the company's prospects. I concluded that the strong performance of the data center group and the cash cow PC Group were subsidizing the losses of the architecture business too much. Despite the possible sale of the television activities, losses are seen up in 2014, which is a big disappointment.

Intel has lost its status as a growth company a long time ago, and is now a value play with investors eagerly looking for their quarterly dividends, accompanied by modest share repurchases. As the company cannot give shareholders prospects for growth in 2014, this is a big disappointment. This is despite recent and anticipated product launches from Broadwell and Bay Trail, among others.

While the results will undoubtedly be scrutinized by shareholders going forward, investors will focus on the numbers in the tablet area, as Intel's dependence on personal computers is a big long-term threat. So the prospects going forward depend on success in this area. Not having great visibility on the success of these developments, I remain cautious until the product launches for 2014 show a strong success into next year.

While the current high payouts to investors through dividends and share repurchases are financially sustainable, Intel is not your traditional cash cow. Unlike "traditional" high dividend paying companies like oil, food, tobacco or telecom names, Intel faces significant additional risks as its business model is under fire.

For this reason I remain very cautious and stay on the sidelines, despite the high current earnings, payouts and financially solid position.

Source: Intel - Investor Meeting Disappoints, No Growth In 2014