Can Intel Finally Catch A Break?

| About: Intel Corporation (INTC)

Summary

More reports of Intel getting into the iPhone.

However, IDC takes down its PC forecast.

Catalyst needed to break stock out of current range.

When it comes to chip giant Intel (NASDAQ:INTC), it seems that every piece of good news is countered by something negative. For all that has happened to Intel in the past couple of years, the stock is basically flat since its Q2 2014 earnings report. The latest news on the company seems to confirm that Intel is likely to stay range bound until some new catalyst comes to light.

Back to the iPhone:

The latest set of phone rumors came out Friday when Bloomberg reported that Apple (NASDAQ:AAPL) will be using Intel 4G baseband modems meant for AT&T's (NYSE:T) network, along with some overseas markets. Those iPhones headed for Verizon's (NYSE:VZ) network, along with ones going to China, will stay current supplier Qualcomm (NASDAQ:QCOM).

We've been hearing all along that Intel would receive approximately 30% of the iPhone's business this year, so I don't think the latest news does much to change that either way. AT&T is one of the two main US carriers, so that represents a chunk of iPhone sales, and other international markets will chip in a little. If things go well this year, can Intel steal more share from Qualcomm in 2017?

The main question here is how will this impact Intel financially? To make a major move into tablets, Intel relied on contra-revenues that really hurt the company's mobile margins. If Intel is giving Apple a great deal to try and gain market share, the same will happen again. We hopefully will get more on this situation at the Q2 report when Intel gives guidance for the second half of the year, and hopefully some analysts will try to get additional color from management.

Back to the PC...

We also got some bad news out of IDC, which took down its PC shipment forecast for the year by about 200 basis points. The group is now expecting a 7.3% decline in 2016, partly due to a worse than expected Q1. It was weakness in the PC space that caused Intel to reduce its yearly revenue guidance at the Q1 earnings report. At that point, analysts were looking for 5.3% growth this year, helped by the Altera purchase and extra week in the fiscal year. Estimates have continued to come down since then, with the street currently expecting just 3.1% revenue growth in 2016.

The decision from Microsoft (NASDAQ:MSFT) to give out free Windows 10 upgrades has held back some from upgrading their computer hardware. If Intel cannot overcome this PC weakness, it might need to take down its yearly guidance again, this time to revenue growth in the low single digits. Unfortunately for the chip giant, this has been the dominant pattern in recent years, start with high guidance and reduce it throughout the year.

Intel needs a catalyst:

For the stock to get moving again, something has to change in a big way. PC sales declines leveling off would certainly be a help, and perhaps the company can get some of its other business units like IoT to start show progress we've been waiting for. The large restructuring should eventually help the bottom line.

Last month, I asked if the company should consider taking out more debt in order to buyback shares. This scenario would look even better now given the continued fall in US interest rates, combined with the fact that many expect the Fed to hike perhaps in July. A decent buyback could also realize a cash flow savings since after tax debt costs would be lower than the dividend payments Intel would save by reducing the share count.

While the Altera deal was rather significant in terms of purchase price, Intel management is willing to do more deals. Currently, however, there is no shopping list, which I think is a mistake (if Krzanich is being truthful). A company that needs growth should always have a list of potential acquisitions in mind. Intel needs to find new areas for growth, and the article above suggests cybersecurity as one potential area to consider. While a few billion dollars in the cyber space will likely only get you a few hundred million or so in annual revenues, at least Intel would bring on a business that's growing at a very fast clip.

Final thoughts:

The ongoing narrative continued for Intel last week. While we got more insight into the modem progress for the upcoming iPhone launch, IDC also took down its PC forecast for 2016. It seems like every piece of good news for the chip giant is countered by something bad. Intel desperately needs a catalyst to break out of its current trading range, and a decent buyback or acquisition might be able to do the trick. Until then, Intel remains a solid income investment thanks to its dividend, but the stock is unlikely to be a major mover in either direction.

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