Why Intel's Future Looks Incredibly Bright And Profitable

Dec. 4.11 | About: Intel Corporation (INTC)

By John Elam

With consumers making the change to handheld electronics, which computer chip company is best prepared to meet the increasing needs of customers has become a question on technology investors minds. While not the only player in the personal computer processor market, every conversation must begin or at least involve Intel Corporation (NASDAQ:INTC). INTC's control over the chip market is not exhaustive, other players have consistently pushed INTC to improve, but its sheer size and advantageous development of the x86 chip set decades ago has prevented major shifts in its control.

Much of the new discussion surrounding INTC in recent weeks has revolved around the actions of its relatively small venture capital arm. Capex from this group ran $500 million out of a total capex budget of nearly $9.8 billion. Capex, in total, has exploded over the last year, as Intel anticipated, from $3 to $5 billion annually from 2002-2010. Intel capital is known to make half of its investments overseas, but has recently moved that focus away from developed markets, instead concentrating on more aggressive plays in Asia, Eastern Europe and Brazil.

One recent investment worth noting is in the Indian software company Happy Minds, a cloud computing and software engineering company. Outside of India but within Asia, China has seen significant investment as of late by INTC, totally over $70 million this year alone, and shows few signs of holding back going forward. Other discussions at INTC involve questions surrounding internal inventory levels and inventory levels of its customers. With increased demand expected in the computer industry, shortages in computer chips may prove to be detrimental both in the short term by failing to maximize on consumer demand, but also may drive costs higher and speed up the movement towards tablet devices.

While the transition into a Sci Fi world where people ride Segways controlled by projectors may be some time off, the move to a world that actively utilized tablets is upon us. That should worry some investors as this dramatic change challenges some of the advantages that have been perennial for INTC, but should not be an automatic signal to abandon ship.

INTC continues to have significant advantages in the chip industry, ranging from size, existing clients, patents and technology. While earnings per share are not what they could be, the improvement is encouraging, and the firm has continued to keep debt levels low, a decision that they may benefit from if credit lines dry up again.

Another positive sign at INTC is an increase in property, plant, and equipment spending, over $4.5 billion during the nine months leading up to October 1st. While this may be a sign of many things, internal investment is frequently a sign of strength and a positive outlook for the future, and both are things investors should note.

Finally, the strong cash position, over $7 billion as of October 1st, allows the firm to either operate under questionable circumstances or make strategic investments and improvements if necessary. While cash can be seen as a sign of unsure leadership, at this time cash may be king, and INTC may simply be waiting to apply it once consumers settle out.

Focusing on INTC’s competitors we see that market players moving in many different directions in order to remain profitable today and position themselves going forward. Advanced Micro Devices (NYSE:AMD), INTC’s long standing rival, recently announced it's moving its focus away from competing head to head with INTC over the microprocessor market. More broadly it appears that AMD is trying to create its own image, separating itself from being viewed as the competitor of INTC to another leading firm in the market and intendeds to put a higher emphasis on higher margin products such as servers.

While this may impact each firm in the longer term, don’t expect anything to change in the short term, AMD will continue compete with INTC in existing channels and INTC will continue dominate the majority of competitions. Another competitor, although on a lesser level, Texas Instruments Incorporated (NYSE:TXN) continues to experience questioning and fluctuation in value by the broader market.

TXN has seen a 7% decrease in quarterly revenue growth, year over year, and sells at a richer price to earnings multiple than INTC at around 13. The development and production of new technology by TXN including sub-1 GHz wireless at a low price is continuing to open the doors of the firm into new markets and has a very large potential upside. This specific development has the potential to impact the toy industry, remote controls, home automation and security systems.

Maxim Integrated Products, Inc. (NASDAQ:MXIM), another producer of analog chips has expressed difficulty in the present market conditions specifically a result of inventory management. While its long term success is largely tied to the continued investment into battery saving technologies for mobile devices, MXIM specialization into advanced chips means that until the market becomes more stable and predictable income is likely to continue to fluctuate. MXIM sells at a PE of 16 but with only modest revenue growth of 1.6%. Gross margins remain intact, around 62% for its high value products.

British microprocessor designer ARM Holdings plc (NASDAQ:ARMH) is trading on the upper edge of its 52 week average and offers several other potential advantages to investors. ARM continues to maintain its gross margin north of 95% with quarterly revenue growth just shy of 20%; however, shares sell at a PE of 75. While the future of any major economy appears to be constantly under question, the financial separation of the UK from the euro provides companies some protection from the rampant fluctuation caused by investor speculation in the euro.

Additional strength for the business, and in turn investors, remains in its downside protection resulting from its business model of selling and leasing designs and intellectual property to third party developers and as such are not as tied down to actual production. When compared to Micron (NASDAQ:MU), Intel has a better handle on its cash and cash flows, with operating cash flows running around $19.8 billion. As for EPS, analyst expect $0.69 for the current quarter compared to $0.53 last year. The next earnings date is January 19, 2012.

When all is said and done, INTC is at worst a hold but more likely a buy. With AMD moving away from direct competition, INTC appears to have an even brighter future, if that’s possible, in the PC market. Even if a significant portion of the market moves to tablets or hand held devices, INTC will still profit substantially from the PC market and is sure to at least compete at some level in the portable device market.

INTC’s sheer size means that even a small investment will equal major moves by smaller firms, helping to ensure its continued success. Finally, for dividend investors, INTC pays dividends quarterly, ensuring cash flow to portfolios that need it, and developing some sort of return almost immediately after investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.