Poor Intel (INTC). It seems like every quarter they announce a new record for earnings and revenue, and every quarter the stock stagnates. Record margins, new chips, raised dividends, and yet still nothing. Intel even announced share buybacks, a current favorite of investors, and the stock price still didn't budge. However with yesterday's announcement about mobile computing chips, this stock may finally be ready to move.
Here's Intel from the start of 2010 versus the S&P500.
(Click to enlarge)
While things haven't been horrible, Intel has had only a third of the gains of the venerable index, even though this company, unlike fellow DJIA tech giant Cisco (CSCO), is putting up good numbers. It seems like nothing can move this stock, heck, on CNBC's "Fast Money," there was even a crack about “Intel is where money goes to die.”
How did the world's biggest chip maker get to this point? Here's the background.
Over the last year or so, real concerns have developed about Intel, not so much on products or efficiency, but broadly based in 2 categories. Management competency and lack of mobile exposure.
Management has been a little off their game by investor's reckoning. For one thing, there was a very weird acquisition of McAfee, the hard to spell maker of anti-virus software. The dip on the chart to the $17s is the fallout of the McAfee purchase.
First, the effectiveness of a hardware company running a software company was a very legitimate concern. Also, anti virus software does not exactly have the world's biggest barriers to entry: you could probably sit down three graduate programmers at any university and have them come up with one. There's even plenty of free anti-virus software available (I use Avast, it's great). And despite these drawbacks, Intel paid $7.6 billion. That was a premium of 60%!
In the words of Morningstar's Pat Dorsey, it was a real head scratcher. It smacked of the board having too much money and not enough brains.
Other blunders have been made, for instance, an ill advised partnership with struggling cellphone manufacturer Nokia (NOK) to bring Intel's Meego mobile OS to market. That of course just went belly up with Nokia's partnership with Microsoft (MSFT). An error in Intel's new Sandy Bridge chip will cost Intel $700 million to redesign and replace the faulty chips. It's these kind of mistakes and odd decisions that have left investors wondering if perhaps Intel's Blue Men are actually running the company.
More important than any of those fumbles though is the view that Intel is increasingly being left behind by the mobile computing wave. Intel's chips dominate computers, but have been convincingly absent in the hottest devices; smartphones and tablets. Their processors are powerful, but use too much energy as mobile devices need to be small, light and have long battery life. There's a feeling everywhere that these “mobile computers” will be the bulk of what consumers will use in the very near future for their internet access, rather than bulky desk and laptops. Investors feel that while Intel may dominate their market, they are dominating a legacy market, not unlike aforementioned Nokia (or dare I say it? Microsoft?).
Investors place a lot of emphasis on these new gadgets, as you can tell by some multiples on two mobile giants. Qualcomm (QCOM) is currently priced at 27X earnings. ARM's (ARM) multiple? It's a whopping 100X earnings. Yes, you heard me right, 100X earnings. You can see where the tech money has gone, and it's no wonder Intel is stuck in neutral.
Now that you know why Intel has been in the doldrums, let's look at why I say this stock may be poised for a big move.
Let's start with the announcement I mentioned:
“At an investor conference on Tuesday, (Intel CFO) Smith again said Intel's new 32 nanometer chip would help the Santa Clara, Calif.-based company expand into smartphones. He said the processor, dubbed Medfield, provides twice the performance but comparable energy consumption as current-generation ARM semiconductors when used in Google Inc.'s (GOOG) Android devices.“
They are projecting Medfield's release and Intel powered smartphones by the end of 2011 or early 2012. That's big news. If those statistics are true and the release is accurate, it puts Intel, with all its manufacturing expertise, business relationships and scale advantage squarely in the mobile game. That's the missing piece of the equation, because Intel is looking very good in many areas.
First of all, they dominate server processors, currently with the Xeon. This is important, because as CEO Paul Otellini correctly pointed out, the mobile wave is not just about the receiver of the data. You see, there has to be a server giving out that information, so as client usage expands, there must be equal server expansion.
Secondly, despite the design error, Sandy Bridge has real potential. It's not only powerful, it cuts energy usage greatly. It has the possibility to be a real blockbuster in laptops. There's also an area of fast potential growth that is being overlooked by investors: Solid State Drives. SSDs are basically flash version of hard drives. They go inside your computer like a hard drive, but are much faster to access, and since there are no moving parts, less likely to break and more energy efficient. These are gaining popularity in servers and a natural for mobile computing. Intel is a leader in SSDs.
Thirdly, I want to call your attention to a recent report by Merrill Lynch. They are extremely bullish on large cap tech in general, stating that these are inexpensive, have great foreign exposure and will benefit from increased capex.
"Since November, we have highlighted that Tech provides the best reward vs. risk opportunity. Tech has strong sales and earnings growth driven by high foreign exposure and rising business spending, one of the highest EPS revision ratios, and was one of only two sectors whose 4Q net margins improved on a sequential and yr/yr basis. Yet at only 14x our 2011E EPS, Tech is trading among its cheapest valuations since 1995. In addition, strong balance sheets and low payout ratios allow Tech to increase cash distribution to shareholders.”
The reports lists 10 stocks to buy which includes Intel.
Finally, take a look at the fundamentals of Intel itself. It's actually very cheap at a little over 10X earnings and quite strong: Almost record margins, revenue and profits and little debt. Compare that to Cisco trading at 14X earnings and where margins are falling, revenue is down, and management sits on $40 billion that earns nothing. Intel has a good yield at 3.3% and they raise it: The dividend has actually doubled three times since 2001. In January they announced $10 billion additional share repurchases, a little less than 10% of their market cap. While buybacks are not my favorite use of shareholder money, at least it beats picking up another anti virus company, right?
There's even a small vote of confidence: Since the smartphone announcement, Intel is up 2.5%, while the S&P 500 is only up .5%.
With the announcement of an upcoming power saving processor and their use in smartphones, Intel may finally be giving investors what they want to hear. If that's the case, this cheap tech giant should be an excellent investment.
Disclosure: I am long INTC. No positions in Cisco, Microsoft, ARM or Qualcomm.
