Intel Meets Bears On Bay Trail

| About: Intel Corporation (INTC)
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Intel (NASDAQ:INTC) stock jumped over 3% after Jefferies Group said "Buy" believing the tech giant is finally making appreciable strides in the mobile and low-end PC markets. With 80% of the microprocessor market, and a massive research and development commitment, why so many doubters?

Bay Trail fails to convince Wall Street

Jefferies is high on the "low cost, low power, high performance product line led by Bay Trail." Argus upgraded Intel to a "Buy" viewing Bay Trail as a "big shot in the arm." Fifteen analysts give it a "Buy" while 16 say "Hold."

But six say "Sell," with Goldman Sachs setting a target price of $16.00. Maybe Intel V. P. David Perlmutter was listening when he unloaded 443,375 company shares at $22.29. (ValueWalk)

'60 billion reasons to buy'

Intel R&D spending, which was $13 billion in fiscal year 2013, was up 30% over 2012. It has committed to spending $60 billion over three years on CapEx and R&D. Extraordinary R&D spending artificially depresses net income and should drive future growth.

After attending the Intel developers conference, Jefferies analyst Mark Lipacis believes Intel:

...offers one of the best alpha generation opportunities in semis (because) it is finally focusing its manufacturing leadership to make MPUs that are lower power, higher performance and cheaper than competitive solutions.

CEO Brian Krzanich peeps into the Intel future, convinced the company now embraces the "idea that it needs to dominate the low-end and low-power portion of the market."

Lipacis thinks Wall Street is not taking Intel's big process lead over Taiwan Semiconductor Manufacturing (NYSE:TSM) seriously, or properly valuing the potential impact of its impending 14-nanometer Atom. As he sees it: "No one has Intel's capability and know-how, and Intel appears to be distancing itself from the competition." (Barron's)

How the Bay Trail bulls see it

For bulls, the argument against buying Intel stock goes:

  1. Intel's core PC market is deteriorating.
  2. Mobile computing offers slimmer profits.
  3. R&D expenditure won't save them.

Intel net revenue declined 3.8% the first half of 2013 compared year-over-year to the 2012 period as the PC market continues to plummet. During the second quarter 2013:

  • PC shipments contracted 10.9%.
  • PC consumer market in Western Europe collapsed 25.8%.

Gartner believes Windows 8.1 and Intel Atom tablet chips "will not fully compensate for the ongoing PC decline" meaning, even if successful, Intel's aggressive research and development (R&D) spending and shift to mobile will not make up for the loss in PC sales. Increased R&D spending shows no positive correlation to Intel profit growth and share price appreciation, and aggressive R&D spending may actually signal weakness and stock depreciation. (Seeking Alpha)

A recent Bernstein Research "Black Book" study assigns Intel a price target of $18 saying:

  • The mobile processor market is simply not that profitable, and it's not likely to become super profitable any time soon.
  • For Intel to swap mobile for PC earnings it'll have to take a huge share of the mobile market
  • It's starting from almost nowhere in mobile today.

The company doesn't have the relationships with mobile OEMs it does with PCs - and they're not that easy to build. (ValueWalk)

But the price might double long term

Sure two-thirds of Intel revenue and a greater percentage of profit come from PCs. The company has over 80% market share in desktop and laptop chips, but less than 1% for tablets and smartphones. Earnings per share mall fall 12% to $1.87 while the stock trades for 13 times that.

Positive developments?

  • 22-nanometer Atom chips launched this year.
  • 14 nm Atoms out next year.
  • Samsung (OTC:SSNLF) and Asus choosing Atom chips to replace
  • ARM-based chips in larger Android tablets.
  • Increased data traffic from all those mobile devices will raise demand for Intel server chips.
  • Its billion capital-spending spree should help reduce manufacturing costs and win a new business line: high-end foundry contracts.

Taking the long view, Intel's EPS could rise 8% this year to $2.02, perhaps topping $3 later in the decade. Apply a multiple of 15 to $3 and you have a $45 stock. Five more years of like dividends brings your total to $50.

With a current dividend yield nearly double that of the index, pocket those high yields while waiting for a resurgence. (Barron's)

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.