A few years back, discussing Intel (NASDAQ:INTC) in the context of equities yielding more than the 30-year treasury would have been more appropriate for a work of fiction. Yet, here we are, at the time of writing, with Intel as a $117 billion company, yielding 3.75% due to a quarterly dividends payout of $0.225. The 30-year US Treasury is yielding ~3.68%!
The company has come a very long way from its integrated circuits or Integrated Electronics days in 1968 -- hence the name Intel -- to where it stands right now. And it has helped all of Silicon Valley rise with it. In essence the journey from having to find manufacturers to satisfy IBM's "second source" requirement in case Intel falls apart, to actually exceeding IBM's market cap in the 1990's, and then a whole lot more -- which is no longer true -- is the poster-boy story of Intel and The Valley it helped shape.
In reality, Intel was not the first in Silicon Valley. That honor "usually" goes to Fairchild Semiconductor -- reincarnated and trades as FCS. National Semiconductor -- now part of Texas Instruments (NASDAQ:TXN) -- was also there before INTC. Of course TI, and Motorola were already in that business -- though they are not Silicon Valley-based. Yet, INTC is the one, and not in a small way thanks to the IBM PC, that people associate with The Valley.
As it currently stands, Intel is a diversified technology company, or trying to become one. Be it the traditional processor business or the newer solid-state hard disk, the company has been able -- and continues -- to innovate and evolve in the silicon world. For instance, from the basic PC 8080 processor, server chips, i-Series massive processing, and the Pentium classical products the company is moved into portable devices' processors, first for laptops and now mobiles and wearables. The same story goes for motherboards and their components. Information security software, networks of things, wireless and other communication devices are also part of the new-Intel portfolio. In essence, Intel is attempting to establish itself as a technology company outside "silicon," and is using its massive war-chest to get into other ventures -- figuratively and literally through Intel Capital.
The management and board styles of the company is similar to what you expect from older, century-old companies, such as GE. Each chief executive, from its original founders Noyce and Moore, to the landmark decade of Andy Grove, and now Brian Krzanich, were all bred by the company and rose to the next level. Hence, the continuity in management is exemplary. One though have to keep an eye on "in-breeding." The post-internet bubble era was not very kind to Intel's investors, after all. It is not enough to make the moves in all the directions we listed above. It is more important to achieve significant traction in some of these endeavors, and for that the company executive management and board are essential. This is the only way that the company can shift "revenue generation" away from the "solid" and into the "soft" or the "net."
You see, the new direction of the company seems, and seem is the right word, to emphasize a tilt towards software and devices. In reality, I do not know whether the purpose of this tilt is to embed these software and network technologies in silicon directly, or it is just to diversity out of silicon. This is to be seen. Yet, whether it is Wind River systems, McAfee or their latest natural language purchase, these technologies are on the software side of technology. Hence, that leap into either software or some futuristic integrated solution seems to be Intel's deduced direction -- at least by an outside observer such as you and I.
As such, a CEO from the silicon side of business seems to have been an odd choice. We shall see! Intel does have room to play, as they are by far the most dominant player in "current" such technologies.
One caution though, we have seen in technology that the whole space you play in can just disappear. Look at how rapidly mobile phones are replacing laptops and you realize that a delayed, incorrect, or untimely move can render the biggest and greatest irrelevant. We shall go over this point later in the discussion.
Reading the board of directors bios is a walk through a "Who's Who" list. They all seem to quite competent with great diversity. The board has good emphasis on outside directors, well balanced with ex-executives. Similarly, the executive team seems to be quite competent. Compensation, as is usual in Silicon Valley, is comparatively light on the salary side and heavy on the stock options side.
As this is the first Silicon Valley technology stock we cover in this series, you should frequently check the insider transaction history for such companies, regardless of how big they are. As hinted above, many employees earn more in stock options than they do in salary. Hence, you can deduce good information about insiders' perspective of a technology company from such info. For INTC, there does not seem to be any serious recent concern on that front.
Checking the dividends history reflects two observations. The first is that INTC is relatively new in the high-yielding business. Yes, dividends payout is something that started decades back, but one sees interesting dividends yields only after 2005. Considering that the company's stock was trading in the $70's in late 2000 and it traded mainly in the $20's for the last decade, it is clear that the yield also got a boost from the depressed stock price.
The second observation is that the company has a history of increasing the payout amount. As such, even if the dividends yield does drop below that of the 30-year treasury due to some market action, your payouts are somewhat inflation-adjusted due to these payout increases -- assuming of course that this pattern holds in the future. Actually, the average year-to-year increase over the last few years was above a very respectable 10%.
At the time of writing, the Q4-2013 official quarterly report (10-Q) was not filed with the SEC, even though the earnings announcement was made almost a month ago. As such, I will resort to the Q3-2013 report.
None of the cash flow -- income and expenses -- nor the equity -- assets and liabilities -- would strike you as odd. If anything, the legendary margins ($8.4 billion in gross margin on $13.5 billion in net revenue) is the first thing to greet you on page 2. Mind you, some long term INTC investors view these 62% margins as depressed!
There seems to be a typo in the filed report relating to the dividends item on page 2, as this conflicts with their website and announcements. Looking at page 5 and dividing the payout amount listed by the number of shares confirms that it is a typo!
The intangibles and goodwill are reasonable, compared to the overall asset base. Note that the "property" amounts and depreciation numbers (pages 4-5) confirm what we already know about this business being capital intensive and quickly depreciated. After all, the drive to build facilities for the ever larger wafers -- 300mm exists, 450mm planned -- and thinner die with its current Broadwell 14 nm die products, is extremely costly, and technically complicated.
Other than the usual focus points mentioned above, it is worthwhile noting that the company details - to a fault - their investment portfolio and the like. Yes, they have more than $30 billion in cash and investments, but this amount of information may be overwhelming. If anything, it gives the impression that INTC is turning into an investment bank. And as such, the numbers on page 3 are unflattering. Further, an investment bank with $30 billion in own money would be generating a whole lot more revenue and profit off that capital base than these meager returns. An investment bank "plays" with someone else's money -- 10:1 of assets:capital would be a conservative number in that case -- and not their own!
It takes getting to page 32 to get to my desired information, sector breakup, in order to discern relative importance of the operating divisions.
Clearly, the PC division accounts for $8.4 billion of the total $13.5 billion in revenue with the bulk of the rest coming from the Data Center group. That is, Intel is still a hardware company, with other divisions contributing little to the revenue and to all the losses!
To remind of my statement from an earlier article about high dividends-yielding equities: "capital preservation and dividend payout stability should be my paramount focus."
We have seen that dividends is not an issue. But, as you will see below, we shall break from the pattern of earlier articles here, where conclusions about capital preservation were made mainly upon the financials. In Intel's case, capital preservation and company prospects are inseparable from technological advances. Something that was not true for most of the issues we discussed -- save the telecoms.
You see, Intel, for most of its half-a-century history, was synonymous to the microprocessor technology, or the brains of the computer. It is here that the fabulous margins it commands are earned. Yet, it is the Achilles heel of the company, given the group-revenue breakup discussed above.
In its attempt to diversify, as evidenced above, it is my fear that INTC is missing on new disruptive technologies in this space.
The utmost concern is that Moore's law -- that processing capacity/density will double every two years -- will reach its quantum-theoretical limit in 20 years. The replacement, being quantum computing, is not a field that I can discern that Intel is active in.
In particular, silicon will start topping off well before such quantum limits are reached. On the other hand, Carbon Nanotube Field Effect Transistor technology (CNTFET), around for more than 15 years, is another technology that can approach closer to the above Moore-Law Quantum-Death date. Yet again, I cannot discern Intel's activities in that space.
Mind you, these are disruptive technologies, where the death of the silicon semiconductor, if such technologies are ever commercialized, will be sudden and violent.
The Broadwell project may not answer the above, but it may quell or answer some of the more imminent threats, coming mainly from three active and simultaneous technologies and companies.
Firstly, each of us who owns a laptop, is unwittingly carrying a supercomputer with them. That is called the "Graphics Processing Unit" or GPU, wich is the main part of the graphics chipset. NVidia (NASDAQ:NVDA) and -- believe it or not -- AMD have always been far ahead of Intel in that space. The realization that the graphics card can be used for its own processing power, rather than just rendering graphics, have been around for a while. That represents a more serious and immediate threat to Intel's high performance CPU dominance, using existing silicon technology, than CNT or quantum computing. Yes, INTC had a cross licensing agreement with NVDA, but until we see something real, I cannot discern a direction.
Secondly, beyond physics, heat and energy loss is a very real issue, both from an ecological point of view as well as for portable devices. Apple (NASDAQ:AAPL)'s ARM technology -- not to get into the details of that relationship here -- is the leader on that front. Just look at the battery life of AAPL's portables compared to others and you can see the obvious.
Thirdly, and in particular for mobile convergence, Qualcomm (NASDAQ:QCOM) is a long-established and a fierce competitor to recon with.
For these latter set of existential challenges, we need to see what Broadwell brings in the second half of the year. Yes, Intel in the past has been successful in fielding threats to its processor business from the likes of Digital Equipment (the Alpha chip), Sun Microsystems (SPARC), and IBM (z-Series). But these were all playing in the same "universe." Some of the challenges above are from different "business" and "physics" universes.
The view that an investment in Intel's common stock can be treated as a high quality 30-year+ bond or a perpetual annuity is being challenged now, and can be obliterated "in short order," unless Intel proves that it can command more income from other sources (the diversification they are undertaking). Alternatively, they can become a serious player in one of these technologies or introduce their own disruptive technology. Otherwise, Mighty Intel may go the way of the many great companies in the semiconductor business that are no longer with us -- at least not in original form.
As we resort to charting, we start by looking at the 10-year monthly chart -- a very unflattering chart.
Not only was the leftover effect of the internet bubble still eroding shareholder value, but the surprising effect of the financial crisis on such large-cap, highly capitalized high-tech company was reminiscent of that on a bank and not a well-capitalized Silicon Valley company. There is a discernible recovery pattern since 2009, but the rate of growth is quite anemic, at best. Effectively, one to concede, which is not a bad thing for the purposes of this article, that Intel stock price has been behaving, of late, more like a old-tech industry than a Silicon Valley leader.
In fairness, this is not INTC's problem alone. Look at Intel's stock price movement against its competitors (NVDA, FCS, TXN, QCOM) and you see that the last decade was not kind to this sector -- save the NVDA and QCOM high fliers, who seem to have found a path of growth.
To drive the point further, compare above charts to those of the Intel-GE chart below, and you see that maturity has come upon this company and most of its sector, which is starting to behave more like a GE than an Apple.
Examining the more recent history, using the below weekly 3-year chart, confirms this stagnated picture. Effectively, the chart discloses a stock that is more suited for being treated as a "bond" or for technical trading that it is for capital appreciation.
In conclusion, Intel is a beaten-up giant that needs to wake up and find direction. The high margins, and all of its profit, come from traditional business, with new purchases and expansions, including purely financial investments, contributing little to the profit and dragging the margins.
This traditional business of the company is under existential threat from "physics" through the evolving quantum and carbon nanotube computing technologies. It is also under more immediate threat from business and technology partners and foes.
As such, even though the dividends part of our thesis about high-yielding equities applies well to INTC, it is the stock-value, or capital preservation, that can come under sudden attack unless the company produces a winning strategy and shows discernible traction on that.