Warren Buffett is a well known figure in the world of value investing; when he speaks, people listen, and when he moves, people take notice. Mr. Buffett's Berkshire Hathaway (BRK.A, BRK.B) recently disclosed that it divested itself of its 7.7M share Intel Corporation (INTC) stake during the most recent quarter. I maintain that investors who understand their Intel investments should not panic and sell their shares and that the reasons behind this sell are not linked to Intel's fundamentals, but are in fact due to the fact that Warren Buffett simply found places that he was more comfortable investing his money.
"Never Invest In A Business You Cannot Understand"
One of Warren Buffett's tenets is that he invests only in what he understands. While a number of the attractive aspects of Intel's stock are easily understood by even the least technically inclined (strong dividend yield, shrinking share count, history of strong profitability), understanding the significance of Intel's competitive advantage is a whole different ball-game.
It takes a solid understanding of the technology to understand Intel's micro-architectural and design prowess, significant semiconductor manufacturing advantage, best-in-class software division, and general technological investments. Given Buffett's historical investments, I am not convinced that he was truly comfortable enough with the story behind Intel to really have true conviction either way on the company.
Buffett's Other Technology Bet
Interestingly, Buffett added to his International Business Machines (IBM) position. On the surface, this is actually puzzling for a number of fundamental reasons:
- Intel's dividend yield is much more attractive at 3.4% versus IBM's 1.7%
- Intel has $13.65B in cash and $7.23B in debt, whereas IBM has $11.23B in cash and a whopping $32.44B in debt
- Intel is valued at 11.18x past earnings and 10.33x future earnings, while IBM weighs in at 14.62x past earnings and 12.07x future earnings.
However, it's actually straightforward to see why Buffett would prefer a company like IBM to something along the lines of Intel: it's all about visibility.
IBM's future is actually a whole lot more certain and the outlook here is stable. It is primarily a software and services company (both segments comprising roughly 84% of the revenue) with a minimal focus on hardware (16% of revenues). These are high margin, high barrier to entry areas. In addition to consistent performance of the business (and the stock, which is almost always near or at all-time highs), it is unlikely that a small upstart will be able to successfully challenge and dethrone IBM at what it does, which is very characteristic of the businesses that Buffett likes to invest in (IBM would probably just buy it out). To get a more detailed look on a solid long-term thesis on IBM, I recommend, "Why Invest In IBM?" by Dividendinvestr.
On the other hand, Intel is currently gearing up for a very uncertain paradigm shift in the compute world. Will tablets and "super-phones" running on ARM-based (ARMH) chips displace Intel in all but the highest performance segments of consumer computing? Will a vendor such as Nvidia (NVDA), Qualcomm (QCOM), or Marvell (MRVL) successfully develop a high performance ARM-based CPU core that can compete successfully at the high end of compute (Nvidia has already disclosed its intentions to do so with "Project Denver", and Marvell already has a custom ARM-based CPU for low power server use)? Can Intel compete in the smartphone market?
These uncertainties, coupled with Buffett's general discomfort with technology stocks in general, likely (and very understandably) made the investment seem like too much of a risk for him.
Despite Buffett's Sell, Intel's Story Remains Intact
Intel's a strong company with a track record of doing what it needs to emerge the victor. Remember Cyrix? Via? IBM's own x86 chips? All a distant memory. Advanced Micro Devices (AMD) is still fighting Intel in the x86 space, but the short-lived advantage that AMD held over Intel between 2003 and 2006 came to a bitter end with Intel's "Tick Tock", and now the company is having serious problems competing with Intel head-to-head. Let's also not forget how MIPS Technologies (MIPS), and other RISC processors were supposed to take over the server world:
The bullish and bearish theses on Intel is more widely covered in detail in other articles here. For more in-depth coverage, I recommend:
- "Intel's Ultrabooks Prove rumors Of The PC's Demise Are Greatly Exaggerated" by Skyler Greene
- "Buffett's Intel Exit: Tech Distrust, Or Real Concern?" by Cris Frangold
- "Intel: A Must Buy For Long-Term And Short-Term Investors" by Andy Batts
- "Intel Has 25% Upside Potential", by Mathias Holmstrom
Is Intel's future somewhat uncertain at this juncture? Yes. It's not clear how the shift in mainstream computing will play out. But Intel has been strong in the past and has only become more aggressive on all fronts as time has marched on. The odds are in the company's favor, and with an attractive valuation, a strong net cash position, a generous dividend, and world-class products in each of its core businesses, I'll take my chances.
In any case, if you are a current Intel shareholder, Buffett's move is absolutely not a reason to sell; nothing in the short- or even long-term investment thesis has changed.