By Renee O'Farrell
Intel (INTC) is the world leader in processors, at least as far as PCs are concerned. Its processors are in over 80% of the world's personal computers, but the company has not enjoyed nearly the same success with tablets, occupying just 16% of the market. Intel rival ARM Holdings (ARMH) is in the number one slot, at 30% of the market. Even Apple (AAPL), which has a historically strong relationship with Intel, has opted to use ARM Holding's processors in its wildly popular iPad.
Intel is rapidly try to up its ante, developing chips that are more power efficient and run cooler - both necessities for today's small tablets and thin computers. One of Intel's newer offerings is called the Ivy Bridge. It is a quad-core processor that is heat-efficient enough to be able to run in a 13" MacBook Pro. Intel is also developing a Medfield Atom chip. This chip should allow Intel's processors to go mobile, delivering speed and good rates of power consumption in a small footprint.
However, Intel's moves in this sector are not limited to processors and microprocessors. Don't forget, Intel is one of those companies that own its ecosystem. As more people turn toward smaller lighter laptops - for those people that need to do a little more than what a tablet provides, but have no need for large laptops with tons of memory - Intel is looking to get into the game. It is developing a new product called an Ultrabook. These Ultrabooks are designed to compete directly with Apple's MacBook Air, delivering absolute mobility, strong performance, security and design at a low price, possibly even more competitive than the MacBook Air. The rumor is that Intel's Ultrabook will go as low as $699. The system will run Microsoft (MSFT)'s Windows 8 operating system and may incorporate touch input.
It all sounds intriguing, but we will have to see how it goes. Realistically, Intel getting into laptops could be like Microsoft getting into music (remember the Microsoft Zune?) - a massive fail. I think Intel is moving in this direction in a bid to hedge its operations.
For one, it would provide an outlet for its smaller laptop processors should Apple decide to stop using Intel processors in its MacBook Air laptops, or its other products. Apple already opted to use Intel competitor ARM Holdings for its iPad. As the company works to make its MacBook Air ever thinner, lighter and faster, switching to a tablet processor would be a reasonable way to go. Then, there is Microsoft to consider. Intel has a long-standing alliance with the company, but that did not stop Microsoft from forging an agreement with ARM Holdings to offer notebooks (they should hit the market in 2013). Intel could end up being the odd man out if it does not act quick - enter the Ultrabook.
Intel recently traded at $28 a share with an 84 cent dividend (3.10% yield). The company's earnings grew 21.20% compared to the same quarter last year. Analysts estimate that Intel's earnings will increase by an average of 11.61% a year over the next five years, versus 14.53% for its industry and 10.61% for the market. For all that, the company is still priced low at just 10.87 times its future earnings.
In as much as Intel and ARM Holdings seem to be neck in neck, I want you to keep in mind that Intel does everything. It designs, manufactures and markets its processors. ARM Holdings does not. Instead, it licenses other companies like Texas Instruments (TXN) and NVIDIA (NVDA) to manufacture its designs. This means that Intel has different operational concerns from ARM Holdings. Intel is much more like NVIDIA, Texas Instruments, Advanced Micro Devices (AMD) or Qualcomm (QCOM).
Microprocessor company Advanced Micro Devices is currently trading at just under $8 a share. The company does not offer a dividend. Its earnings are expected to grow at marginally the same rate as that of Intel over the next five years, at 11.68% a year on average. Also, Advanced Micro Devices is priced lower at just 9.66 times its forward earnings. However, with not paying a dividend, I think Intel is a much better buy.
Looking at rival NVIDIA, roughly the same holds true. NVIDIA recently traded at just under $15 a share and does not pay a dividend. Analysts predict its earnings will increase by an average of 15% a year over the next five years. This is obviously much better than that expected for Intel, but NVIDIA is also priced higher, with a forward price to earnings ratio of 16.13. I'm not quite sure that it balances out. At least with Intel, if it misses the earnings estimate, there is still the dividend to fall back on.
Texas Instruments recently traded for $32 a share, and it pays a 68 cent (2.10% yield). The dividend looks good, but the company's earnings are expected to increase by just 7.45% a year over the next five years - almost half that of Nvidia. Texas Instruments is also priced somewhat higher relative to its future earnings, with a forward price to earnings ratio of 13.72. All in all, this company looks like more of a hold to me.
Rival Qualcomm is currently trading at $68 a share and pays a modest $1.00 dividend (1.50% yield). Analysts estimate a strong earnings growth of 15.58% a year on average for this company over the next five years, and I think that is reasonable. The company is priced a little high at 16.31 times its forward earnings, but I think between the dividend and the earnings growth, Qualcomm is worth the premium.