2013 was a tough year for Intel Corporation (NASDAQ:INTC). The company has seen a decline in its top and bottom lines. Its share priced moved only 21% last year, from $21.38 per share to 25.96 per share. Year-to-date, the stock surged only 1.6%.
In this report, I have performed a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of Intel. SWOT analysis is one of the best ways to force yourself to consider both the good and the bad about a company and its prospects.
One of Intel's biggest strengths is its commitment to research and development (R&D). A high level of investment in R&D is vital for the company. Without spending the money, it can be impossible to develop products that will live up to expectations. There would be no new improvements or special innovations.
Intel remained the biggest spender on R&D in 2013. Qualcomm (NASDAQ:QCOM) and Samsung (OTC:SSNLF) occupied the second and third place, respectively. Intel's R&D spending reached a record-high $10.6 billion in 2013. Its R&D/sales ratio was 22% in 2013, up from 21% in 2012 and 17% in 2011. In comparison, Qualcomm and Samsung R&D/sales ratio was 20% and 9% in 2013, respectively. Intel's huge R&D budget has allowed it to remain competitive. The research and development did not stay ahead of the curve for the mobile transition but it has allowed Intel to still be competitive.
Another strength of Intel is that it primarily manufactures its products in its own facilities. This in-house manufacturing capability streamlined the process of production, shortened its time to market, and scaled new products more rapidly. More importantly, in-house manufacturing can save the cost of new products, better preparing the company to enter the adjacent market sector. Most of Intel's competitors rely on third-party foundries and subcontractors such as Taiwan Semiconductor Manufacturing Company, Ltd. (NYSE:TSM) and GlobalFoundries Inc.
Intel has a large and loyal base of customers. Once it develops a new product, it is easier for the new product to be accepted by the market. The introduction of Intel Quark SoC family of products can accelerate the pace of entering into the new markets, such as tablet and smartphone markets, if the Intel Quark SoC can compete with other similar products in the aspects of low power consumption and a high level of integration.
Intel's major weakness is downside trends of PC sales in the recent years and this weakness is irreparable. The company expects that PC shipments will decline slightly in 2014. To reduce the impact of the slowdown in the PC market, Intel needs to enter and expand into adjacent market segments, such as smartphones and tablets. However, the success into new markets depends upon several factors, such as the introduction of new products, distribution and marketing strategies, and competition. The company can only succeed in new markets by differentiating itself in technology and cost.
Another most important weakness for Intel is its underutilized capacity. Due to the declining PC sales, the company has not been manufacturing much as in the past, and it has left them with a lot of capacity that is wasted spaced. This is a large amount of fixed cost that could be split up among more products if they had been manufacturing more products. If they had done this, they could have improved the bottom line and been a more profitable company.
The above mentioned weakness of underutilized capacity also presents opportunities for Intel. These opportunities are manufacturing products for other companies with their excess capacity. This would allow the company to prove to other companies that they are able to develop the products needed to compete in the more mobile business. This would also allow it to improve its top and bottom lines, even if it helps its competitors along the way.
Intel introduced many new product technologies across all of its business last year. The achievement of Intel Quark SoC featured ultra-low power can increase the company's competitiveness in the Internet of Things business. The progress of the industries' first 14 nm manufacturing process in 2013 and launch of second generation 3-D transistors in 2014 equip Intel with innovative technology to compete in the new markets.
A threat of Intel is its business model. There are companies that do just chip manufacturing and companies that just sell designs for the chips. This added level of competition makes it easier for their customers to shop around for better deals and to see if they do one part of it maybe they could save some money.
Although Intel currently dominates the server industry, it still faces threats from many other companies. For example, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is planning to make its own ARM-based processor for its server farms and Facebook (NASDAQ:FB) is also currently working on making its own vast server system ARM-compliant. These are worrying developments, as these two tech giants provide significant revenue to Intel. ARM holding also worked out its new Cortex-A53 and Cortex-A57 processor and AMD will also release its "Seattle" processor this year.
Overall, the computing industry is very dynamic. The boundaries between the various segments are changing as the industry evolves. So Intel is facing not only the existing leaders in the new markets, but also numerous large and small competitors in the new markets.
Intel has a few upsides and a few downsides. The world's largest chip maker has been facing some problems, mainly because of the decline in the PC industry. Each year, the company sets a significant budget for its R&D that has allowed it to remain competitive. Although excess capacity is a weakness, it also provides opportunities to generate revenue from utilizing excess capacity.
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.