Why You Should Re-Examine The Business Model Of These Companies

Includes: AMD, INTC, MSFT
by: Robinson Roacho

The PC business has been under pressure after the apparition of the tablets. Because of the portability, customers lean towards tablets as opposed to laptops. Do not get me wrong, there are countless tasks that an ordinary tablet cannot do in comparison with a laptop. However, for daily tasks such as browsing the Internet, reading, and playing media files, the tablet is the choice of excellence.

Therefore, investors should reevaluate their positions in Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) as they are likely to be put under the gun in the interim.

The software giant is in trouble

Microsoft reported increasing revenues for the fourth quarter of 2013 by 10% from $18.0 billion to $19.9 billion. Its net income rose to $6.0 billion, or $0.59 per share, from a net loss of $192 million, or $0.06 per share. At first glance, you may think there was a huge improvement. Unfortunately, it was a backwardation. Let me elaborate.

Windows 8 was released in October 2012. Therefore, it is almost logic that the revenues will jump significantly compared to any quarter in the year ago. To have a best comparison about how the company is doing, we should delve in the earnings report for the fourth quarter of 2010. That would be eight months after the release of the Windows 7, which is the same period right now after the release of Windows 8.





Revenue Change YOY

$3.00 billion


$1.89 billion


In the 4QFY2010 earnings statement, Microsoft reported increasing revenues totaling $16 billion compared to $13 billion for the same quarter a year earlier. The net change was 23%. For the 4QFY2013, its revenues only rose by 10%. Therefore, it is clear that the PC market is struggling, and Microsoft is too.

A new Windows version

Windows 8 was not warmly welcomed by users as its previous versions Win 7 and Win XP. In fact, it still is not. According w3schools.com, which compiles statistics such as user operating system, Internet browser version, and others, only 8% of the computers have Windows 8 installed. The majority of the users are still under Windows 7 (56%) and Windows XP (15%).

The trend of Win 8 is ticking upwards, but that comes from Windows XP users. Win 7 users seem to be happy with the performance of the operating system, and the percentage of users has remained unchanged.

To overcome the weak demand for Windows 8, Microsoft is working on developing an updated version called Windows 8.1. This will incorporate several features from previous platforms such as the iconic "Start" button. Investors should delve into coming earnings reports and monitor websites to determine the acceptance rate of the new OS.

Diversification matters

Microsoft is diversifying to other areas. The development of video gaming consoles has brought significant revenues. Currently, the Xbox 360 competes against the PlayStation 3 for market share. Further, Microsoft expects to launch a new video gaming console named "Xbox One" in November 2013. Sony (NYSE:SNY), is also releasing the PlayStation 4 around the same date.

I would expect high revenues to come within the first year because there has been almost 8 years without a new console. Further, it will incorporate amazing features such as voice recognition and digital cable channel management.

Another company that will benefit from the launch of the Xbox One and the PS4 is Advanced Micro Devices (NASDAQ:AMD). Both video gaming consoles will incorporate the AMD Jaguar processor. Despite who sells more consoles between Sony and Microsoft, AMD's revenues will be unaffected since it provides the chips for both devices. Several analysts claim that the profit margins on the processor are likely to be low. However, investors should determine that by analyzing the first quarter 2014 earnings report.

I believe, though, that this is a great opportunity for AMD to diversify also, and it may aid the chip maker to turn back to profitability in the coming quarters. Therefore, AMD is a buy right now.

Intel may continue to struggle too!

According to its most recent quarterly earnings report, revenues declined by 6% to $12.8 billion and its gross margin declined by 12%. Its net income declined from $2.8 billion, or $0.54 per share, to $2.0 billion, or $0.39 per share.

The company is in huge pressure due to declining PC sales. Intel reported a decline of 5% in overall sales, and the future does not look any brighter with respect to computers.

However, the company is targeting mobile operations in telephones and tablets. The new Intel Atom processor "Bay Trail-T" should provide high performance consuming lower power than previous versions for tablets. There have been recent leaks about the performance of the Bay Trail-T chip, and evidence suggests that it will crush the currently available chips. Qualcomm (NASDAQ:QCOM) may face a tough competition in coming months.

If Intel is successful in expanding towards mobile markets, investors should add some shares. In addition, you would get a modest 4% dividend. In the previous quarter, the company expanded its free cash flow from $2.0 billion to $4.0 billion. Therefore, investors may expect a hike in the dividend payment. The dividend payment has been hiked yearly in average, and the last time was in May 2012. Therefore, I would expect the announcement soon.

The bottom line

The declining PC sales are putting some pressure to Microsoft, Intel and AMD. However, they are exploring other markets. Microsoft is about to release the Xbox One, which should improve its revenues significantly. AMD will provide the processing chips for the Xbox One and the PS4, so its revenues should increase too. Regarding Microsoft, we should wait to see the popularity of the new Windows 8.1 before we can assess the impact on the company's revenues. Lastly, Intel's new chip for tablets appears to be a monster, and I expect that the company will be a major player in the mobile industry.

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.