Over the past month, shares of chip-maker Intel (INTC) have fallen over 10%, while the DJIA has fallen only 7% and the S&P 500 has declined 6.5%. We think this underperformance is unwarranted, especially considering the company's fantastic results over the past several quarters, annual dividend yield of about 3.3%, and pristine balance sheet. That's without even mentioning the brand's unquestioned position as the world's top chip-maker. The firm also registers a 9 on our Valuentum Buying Index (VBI), which suggests the shares represent one of the best investment opportunities available on the market today.
But despite all of this, the bears also have plenty to say about Intel. We dissect some of their key arguments and give our take.
Argument #1: Intel is the only company making slower progress in mobile than Microsoft (MSFT).
This statement is, unfortunately, true. Even the Nokia (NOK) Lumia phone has made greater strides in the smartphone market than Intel has thus far. For instance, in the United States, Intel has virtually no presence. However, the company has released a phone with Lenovo that runs on Intel technology. Though the phone is only available in China, the company will bring Intel chips to Motorola Mobility's (GOOG) phones running the Android operating system later this year. Management also expressed interest in extending the "Wintel" partnership to smart phones on the x86 chip, provided it offers the firm a profitable opportunity.
Intel will also release several new chips for smart phones with 4G LTE capability, as well as chips to run low-end smart phones. The firm does such little business in smart phones right now that any marginal gains in the area will be significant for the segment. Further, the segment represents just over 3% of consolidated revenue, so even if sales in this division went to zero, it would be fairly immaterial.
Argument #2: Apple (AAPL) has frozen Intel out of its ecosystem.
Believe it or not, Apple sells more than just iPhones and iPads. Mac unit shipments have grown 17% year-to-date, and we believe that this trend should continue. All Mac computers have been powered by Intel chips since 2006, and we don't think Intel's position will change in the near future.
However, ARM Holdings (ARM) is the dominant chip designer for Apple mobile products. Though ARM doesn't actually produce the chips, they are behind the chips made by Qualcomm (QCOM) that power iPhones and iPads alike. Needless to say, this is a significant chunk of revenue that Intel's missing out on. Though nothing is definitive, there's always a chance that Apple could opt to use Intel as its chip provider, especially if the firm is able to demonstrate performance excellence with its chips later this year.
Further, though we think the iPhone is the most popular phone in the U.S., the iPhone might not be able to achieve the same success in other markets where phone purchases often aren't subsidized by wireless providers. Currently, the Android operating system is on track to be the most widely-used operating system in the world. Unlike Apple which only sells its own hardware, several different hardware makers run Android, thus making it easier for Intel to win share from ARM, in our view.
Further, cheaper Windows 8 tablets will be released over the next few years, which could induce a new market of customers to purchase tablets. Though we don't think this would hurt Apple at all, sales of a Windows tablet running on Intel chips would certainly be a positive for Intel.
Argument #3: The turmoil in Europe will crush business technology spending overseas.
We don't doubt that Europe is struggling, and sure, that could certainly impair technology investment, even in light of the Windows 8 release. However, it's important for investors to remember the amount of revenue Intel generates in Europe, which was only about $7 billion in 2011, relative to the $54 billion the company generated as a whole. That figure represents 13% of revenue, but we think the company can comfortably stomach even a 20% decline in European sales.
Following the acquisition of McAffe, Intel became a further diversified organization, which will help mitigate effects of a European recession. Yet, as we stated earlier, only 13% of revenue comes from Europe in the first place, and the company has just under $14 billion in cash and equivalents to provide plenty of cushioning in the event of a prolonged weakness. We also wouldn't rule out the possibility of unexpected good news overseas that could lessen negative sentiment.
Argument #4: ARM running Windows 8 will hurt Intel's dominance.
ARM is clearly the dominant chip-designer in the mobile space, but the firm has been unable to make much progress in PCs. This may change now that Microsoft will allow Windows 8 to run on ARM processors. This isn't the first time a chip competitor came in poised to steal share.
AMD (AMD) was supposed to steal market share when it rolled out a line of chips for Windows 7. However, sales languished, and businesses and consumers alike continued to choose Intel-based processors based on the company's positive reputation and general level of awareness. While ARM might be a better designer than AMD, we aren't worried about ARM replacing Intel as the dominant processor on Windows machines.
Ultimately, Intel's balance sheet, lack of European exposure and burgeoning mobile business are all potential upside catalysts, in our view. Shares currently yield 3.3%, which is about 180 basis points higher than 10-year treasuries, and it is among the safest dividend paying stocks, boasting a Valuentum Dividend Cushion score of 3.2. At current levels, we think the firm is undervalued and we may look to add to our position in the portfolio of our newsletter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Some of the firms mentioned in this article may be included in our actively-managed portfolios.