Intel Shorts Are In Trouble

Dec.31.13 | About: Intel Corporation (INTC)

While the big media hoopla surrounding Intel (NASDAQ:INTC) has been around the company "missing the boat" in mobile (i.e. smartphones and tablet), the real problem for Intel has been the decline of the PC. Intel will eventually get there, and it'll get there in a big way on mobile, of this I have no doubt. However, considering that $33 billion of the company's $53 billion in revenues come from the PC market (and this is a 35%+ operating margin business, to boot), this business needs to be healthy for Intel as an investment to work.

Intel Couldn't Work Unless The PC Stabilized

The common view has been that tablets and phones would, forevermore, eat into PC sales until Intel powered PC sales would become a small fraction of what they are today. This view, I and many other Intel bulls have believed, is misguided. At the low end, yes, tablets have been eating into PC sales, but given Intel's comments at its analyst day that Core i5 and i7 were shipping record volumes (not record mix, but VOLUMES) it seems clear that the mid-range and the high end of the PC market is okay and even growing.

Unfortunately, with the low end of the market suffering from an elongated refresh cycle coupled with the advent of tablets, people thought that the PC was in secular decline. What *really* happened here, in my view, is that when the tablet form factor became mainstream, it took significant share of the overall "computing" market and, alone with it, some low end PC units that people were buying for more consumption-oriented uses.

The PC Seems To Have Stabilized

According to Intel at its analyst day, the PC market in mature markets (i.e. USA, some parts of Europe, etc.) has stabilized. The problem with the PC market has actually been in the Asia-Pacific region where tablet cannibalization has been pretty fierce. Now, with the reports from DigiTimes, Maxim, and others claiming that the PC is showing broader signs of stabilization (and Maxim even claims that Intel will hit the high end of its guidance for Q4), this seems to be "it" for the short case.

What's more interesting is that Intel has less than 50% of the sub-$399 PC market but this has largely been due to a lack of focus on products tailored for this space. I believe that with the launch of Bay Trail-M for entry notebooks and Bay Trail-D for entry desktops, Intel not only sees a sizable GM uplift (since these chips are cheaper to make than their similarly-priced Core-based brethren) in the share that it does have in the low end market, but it will also see a meaningful uptick in market share in the $199-$299 market at still healthy GMs. In an environment of a weakening PC market, this is a neutral at best, but in a market that is flat to growing slightly, this could catalyze some pretty serious growth.

If This Is True, Mobile Is Now Incremental, DCG Can Shine Through

If the PC really has stabilized, then all bets are off. This would imply that the PC market could eventually be a slow-growth business again (rather than negative growth) and this would turn mobile into an incremental opportunity. In fact, with a slow growing PC, a fast growing data-center group, and continued growth in NAND, and software & services, mobile becomes a way to drive some pretty serious leverage, particularly as Intel could end up closer to 95%+ factory utilization (huge GM tailwind) as well as, obviously, revenue growth.

That's not to say mobile isn't important if the PC is in better shape; Intel needs to show itself to be a robust growth business going forward if it is to command a premium valuation, but stabilization in PC would go a long way to minimizing the "risk" to the Intel investment. Also, stabilization in PC means that Intel returns to growth as DCG is growing quite nicely.

Conclusion

If the reports are true, then the ~224 million shares short will become increasingly painful for those that hold those positions. Intel is dirt cheap (and cheaper than the current financial metrics would suggest given that the mobile investment is eating away ~$2.5 billion of operating profit for now) and, if its core businesses prove to be safer than expected, then Intel will no longer be "cheap for a reason".

Happy New Year!

Disclosure: I am long INTC. 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.