Seeking Alpha
Long/short equity, research analyst, dividend investing, tech
Profile| Send Message|
( followers)  

Intel Corporation (NASDAQ:INTC) is the technology leader that provides processors, chipsets, motherboards, server systems and other related products that are essential for our increasingly digital society. Intel recently touched a fresh 52-week low of $21.40 after declining 24% in the past six months to erase gains from earlier this year. Intel's stock has been unable to secure continued traction since the tech bubble burst and there are signs that the future is bleak for Intel. Despite being at its low, I would avoid Intel for the three reasons discussed below.

1. Trouble In A Post-PC World:

Intel derives the majority of earnings from components related to the traditional personal computer industry which unfortunately for Intel has been contracting. Consumers and enterprise customers are spending more and more time on portable devices such as tablets and are choosing to upgrade their personal computers more infrequently. Furthermore, Microsoft's (NASDAQ:MSFT) Windows 8 adoption may be slower than many anticipate due to the stability of Windows 7 and the challenging economic environment. In essence, Microsoft did a very good job with Windows 7 so consumers and businesses will be slow to upgrade for a minimal perceived benefit. If Intel is unable to grow revenue significantly in the next year, I find it difficult to believe that the stock will appreciate.

2. AMD Is The Canary In The Coal Mine

Advanced Micro Devices (NYSE:AMD) is one of Intel's chief rivals in the processor sector. AMD recently announced that it plans to fire up to twenty percent of its staff due to slow demand associated with the continuing global slowdown. This news sent AMD's share price down by nearly 15% on Friday and the stock has now declined 65% in the past six months. Despite having a market capitalization that is a mere two percent of Intel's market cap, AMD provides significant insight into Intel's future operations. As you might expect, smaller customers feel the impact of the economic slowdown more quickly so AMD's performance can be a leading indicator of Intel's future. I am not predicting that Intel will be forced to have massive layoffs, but this is a red flag to steer clear for now.

3. Potential For A 15% Revenue Drop

Rumors have been circulating that Apple (NASDAQ:AAPL) could drop Intel as the provider of the Mac processor chips. This speculation is not entirely farfetched as Apple has a history of switching processors to improve margins and performance. Most recently, Apple decided to develop its iOS processors internally with tremendous success. Apple now accounts for 13.6% of U.S. PC unit shipments and it has been steadily rising quarter-over-quarter as Apple's iPhone/iPad halo effect carries to Mac shipments. If Apple decides to execute on a plan in which it designs its own Mac chips, then Intel will be materially impacted. I do not believe that Apple will take such an extreme action anytime soon; however, this is a very real risk that deserves attention. This dark storm cloud will add uncertainty to Intel and keep its share price suppressed.

How To Play It:

The company is set to report fiscal Q3 2012 earnings on October 16. The second quarter earnings surpassed estimates as Ivy Bridge processor adoption was faster than anticipated. Intel recently lowered guidance for both revenue and earnings below the low-end of its previous range due to slower demand and margin compression. I do not expect Intel to drop precipitously after earnings, but next six-to-twelve months could be challenging for the company. Intel could be range bound in the low $20s for the foreseeable future. A Long Condor may be an advantageous strategy to capitalize on the future stagnation.

Disclosure: Author is Long AAPL and AAPL Jan 2013 $705 Calls.

Source: Intel Earnings Preview: Why The Stock Can Go Lower

Additional disclosure: Author is long AAPL Jan 2013 $705 Calls. Please refer to profile page for disclaimers.