After last month's earnings call, Intel Corporation's (INTC) stock pushed higher, peaking slightly below in the mid-26 dollar range. Analysts spoke of some upside potential, especially as the buy still appeared undervalued. But if you scratch the surface, there are some concerns regarding Intel. Namely, it has lowered its year outlook, including its projected growth. In fact, its projected growth was nearly cut in half. With a diminishing macroeconomic outlook and increased competition Intel will have a hard time generating significant returns. I can't agree with those analysts who go long on Intel, especially this recent article which gives Intel a 12-month price target of $40. Instead, I expect to see this stock perform at the same pace as the overall market. It offers a solid dividend yield, so that may be a reason for sticking close, but that may be it.
First things first, Intel gave many reasons to like the stock with its latest earnings announcement. Even in the face of poor conditions for business, it expects to grow between 3% and 5% on the year. Unfortunately this is down from previous guidance of 7-9%, but this expectation was overly rosy to begin with. This means that for Q3, Intel expects revenues to be around $14 billion. To be sure, this is still a reasonable pace to growth, but it certainly does not set the company apart from the tech industry.
On the positive side, Intel saw high growth due to server growth. Specifically, data center growth was at an impressive 14%, bringing in $2.8 billion in revenue this quarter. Without this impressive server growth, the company would have grown very little, as PC and other products have remained about even as they were last quarter.
CEO Paul Otellini reiterated Intel's optimism on the Ultrabook market, although like it was downgraded to more realistic expectations. This is necessary, as the PC market actually decreased from the same time last year, albeit only a margin 0.1%. Nonetheless, it is hard to rely on PCs for growth if the market isn't actually growing. To some extent I think Intel is being overly optimistic in the PC market because of its very poor standing in the mobile phone market.
Since the earnings call, Intel saw a moderate rise, but August prices are down again. That loss could be due to reactions after Warren Buffett's Berkshire Hathaway dumped its share of Intel. Analysts will tell you not to worry, but it has to shake investing confidence to now Buffett chose International Business Machines (IBM) over Intel. And yes, as the writer points out, Intel is a strong company that has always come out ahead of competitors, but this situation may prove its toughest yet, with a formidable competitor and a lagging macroeconomy.
The competitive environment is getting increasing tough for Intel, especially with its poor standing in the mobile phone chip market. It has been said that ARM Holdings (ARMH) supplies about 95% of the chips for mobile phones. With mobile set to outpace PCs, Intel desperately needs to enter into this market. One of the main problems: Intel creates high margin products and the chip market is being commoditized quickly.
To add to its troubles, ARM Holdings is looking to take the competition with Intel into more markets. One of the major concerns is that ARM Holdings has created servers that run on its chips and is now introducing them to the market. With servers also being commoditized very quickly, ARM Holdings will be in a very good position, as its chips are typically cheaper than the high margin x86 chips that Intel uses.
Intel's concerns reach further than servers. Its solid partnership with Microsoft (MSFT) to supply chips to its Windows products is becoming a one-sided partnership, with Microsoft looking to ARM Holdings to supply chips to its Windows phones. Alarmingly, Intel is also losing its monopoly position on Windows for PC chips, as it will only be supplying chips for Windows some of Microsoft's Windows 8 products. In fact, many see a budding relationship with Microsoft as a potential upside of holding ARM Holdings stock. Having said this, for now, ARM Holdings is commonly given a 'hold' recommendation.
Generally speaking, it will be hard to grow at any rapid pace given the poor economic outlook in the world economy. There are three concerning developments. First, in the United States, a slowing economy has hindered growth and disposable income. Those looking to purchase a new Windows 8 laptop might hold off for a little longer. In the emerging markets, the situation is not much better. Specifically, growth in China is slowing and has fallen below 8% for the first time in a very long time. While its growth of 7.8% is still high, you can expect spending to slow as well. In a similar situation, those looking to upgrade to new Intel servers or laptops with Intel chips might hold off. ARM's cheaper chips look all the more attractive, and if they can run on mobile units (a lower production cost, anyway) then that may just be a path producers are forced to take.
There are some good signs at Intel, but there are an equal number of bad signs. Without a poor economic environment, Intel would still be constrained by stiff competition and its nonexistent market share. With the poor macroeconomic environment even its good positions in markets will see decreasing growth. I foresee Intel performing in lock-step with the market. It is vulnerable to the same forces of competition and macroeconomic growth as every other stock is. This stock will bring modest return.