The technology industry is a very dynamic industry per se, and to add to that, as Robert Kiyosaki puts it, the tech sector has currently been the "flavor of the month" for quite some time. Now that leads to a major problem. Average people tend to invest money in an industry that is in the talks. And the dynamism of the industry takes out the stability factor out of it. So you are left with a game of market emotion and a higher chance of failure.
Looking at it, most of the tech investors are playing the "bigger fool" theory, where they are buying stocks of a company, raising the stock prices. And that inspires other investors to put in their money on the company in hope of the stock prices rising again. The problem with this kind of thinking is that it is based purely on market sentiment. And market sentiment is transitory. That is what is proposed by the "random walk theory" in the first place.
As a clear case of confusion between this fundamental and techical investing, let us look at an example of these two tech giants viz. Intel Corp (NASDAQ:INTC) and Apple Inc. (NASDAQ:AAPL). What has primarily gained my attention is the graph below.
Essentially, Apple's stock prices have returned 262.01% in the last five years, compared to a shameful 3.85% of Intel. Needless to say, while I am not saying that Apple is of no value, it is also an example of how people can sometimes keep on investing based on market emotions. On the other hand, Intel might make a strong case of fundamental investing for the clever investors here. In other words, while you might be more inclined to invest in Apple (as you are governed by market emotions), there is a strong chance that you are missing a value stock, that is, Intel.
Reasons of Choosing Intel over Apple
More focus on the Android powered smartphones - In January 2013, Intel entered into Africa when Kenyan wireless operator and Intel partner Safaricom revealed the continent's first Intel smartphone, the Android-powered Yolo. It already has plans to enter into other countries such as China, India, Latin America and Southeast Asia.
At the CES 2013, Intel already announced some improvements in its foray in the mobile chip processor market. Here is an excerpt from this article:
"Today, after a year of preparation, Intel announced the Bay Trail-T microprocessor and the Bay Trail-T tablets that manufacturers are developing for both Windows 8 and Android. The Bay Trail-T is a shrink to 22 nm and enhancement of the Atom Medfield chip currently in production that will deliver as much as twice the performance with extended battery life. The Bay Trail-T is a compatible Wintel microprocessor which will run Windows 8 and any Windows app as well and Android and Android apps. This is an advantage over the ARM powered Microsoft Surface that runs a Microsoft variant called Windows RT that only runs Windows applications that have been re-coded and recompiled.
In February at the Mobile World Congress in Barcelona, Intel is expected to update its investors and partners on its Merrifield processor due to be launched later in 2013. Merrifield, first announced in May 2012 at Intel's investor conference, is targeted at smartphones, a shrink to 22 nm with performance improvements similar to the Bay Trail-T. Intel has begun production of its LTE/4G baseband chip, according to Intel's spokesman Jon Carville."
Is Intel's focus on Android powered phones viable enough? Of course, it is. Google's (NASDAQ:GOOG) Android surged to a whopping 68% share of the global smartphone market last quarter. That's four times the 17% market share held by Apple, according to a recent report from research firm IDC.
If the new Intel-branded chip does well in the 2013 market, we will probably see further growth in the bottom line of the company. That will show as an increase in the market price of the company. On the other hand, unless Apple gain sufficient market share with its latest iPhones and iPads in a year or two, its stock prices can be hit hard and will probably tank.
When you are investing in Intel, you are not only investing in the strong technical prowess of Intel in the semiconductor industry, but also in Android's future potential in the global market, which seems far prettier when compared with Apple.
Economic moat around the company - Again, we are talking about a company that has a market worth of over $100 billion and over 57% share in the microprocessor chips market. Although Qualcomm (NASDAQ:QCOM) occupies around 24% share in the mobile semiconductor market, as last reported in 2011, one thing can set Qualcomm back. It does not have a strong brand as Intel. Consumers buy electronic devices on the very premise that they use Intel's chips. People trust and rely on the quality of Intel's products. Intel's revenue is governed mostly by its technologically sound and market ready products it manufactures. Do you think Intel might not be able to gain that in the mobile market as well?
On the other hand, I have a strong conviction that Apple competes more on brand preference and design. It is basically the "coolness" factor that drives Apple's revenues. Nonetheless, it will be harder (and more expensive) than most people think for Apple to remain as dominant as it is today. It will be harder for it to maintain its profit margins because it's not competing on the basis of pure technology.
Moreover, the biggest entry barrier to the semiconductor industry is the amount of capital expenditure required for a full-fledged business. Intel's research and development (R&D) expenditures were $8.4 billion in 2011 ($6.6 billion in 2010 and $5.7 billion in 2009). And with some new products in the pipeline, it might increase in 2013. Here is the capex ratio of Intel.
It stands well over a whopping 75%! In comparison to that, here is the capex ratio of Apple.
From the graph above, either Apple is not investing enough in its capital assets or that the business it is in does not require that high capital expenditure as required by Intel. In either case, lower capex requirement means lower economic moat for the company.
Return on shareholders' equity - In 2012, Intel earned more than $20 billion in cash. With this huge profit, Intel spent more than $16 billion returning capital to its owners via cash dividends ($4 billion) and share buybacks ($12 billion). In other words, shareholders at Intel kept 80% of the profits. Doing the math, while Intel is worth $100 billion in the market, the current shareholder yield (including cash and share buyback) stands now at over 16%.
On the other hand, Apple earned $50 billion in cash last year. How much was returned to the shareholders? Almost nothing, considering the huge cash hoard of around $150 billion - the shareholders got only $4.5 billion in total dividends (cash and net share buybacks). The company retained more than 90% of its earnings. With Apple's market worth being around $420 billion, the current shareholder yield (including cash and share buyback) stands now at around 10.7%.
In addition to that, let us take a look at the technical price chart of Intel.
In the recent times, there have been more 'green candlesticks' and lesser 'red candlesticks', which says people are getting more and more optimistic about Intel. And if you look closely, it is developing into a triangle pattern, which signifies undecidedness of the market. If you look closely at the A/D line and PVT line, you will see a weakening momentum of the current downtrend. MACD divergence shows lower lows, which indicates that there might be a trend reversal soon. RSI signal of around 40 also confirms the present oversold market condition.
In short, each of the technical indicators says primarily one thing: Intel's share price might rise sometime soon.
While Intel might not be the market's favorite at the moment, it might be a folly to overlook the potential of the stock at this moment. Remember Warren Buffett's famous rule of thumb: Buy when others are selling; sell when others are buying.
With severely oversold market condition, strong fundamentals and future revenue growth forecasts, Intel just might turn out to be a good growth stock along with being a value stock that it is. Not to mention the fact considering the points mentioned above that Intel does seem to be a better investment compared to Apple at the moment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.