Intel A Tepid Investment

| About: Intel Corporation (INTC)

Despite Intel's past success, the company is a lackluster investment. Admittedly, recent developments, investments and partnerships with other technology players help Intel's (NASDAQ:INTC) bottom line and will buttress stock prices and dividend payouts in the near future. Nevertheless, these developments are simply not big enough to offset Intel's prominent dependence on a sluggish PC market.

Important Developments
Intel's newly developed 14-nm Broadwell processors will be critical to successful Intel operations in the 2014 and 2015 fiscal years. These processors are part of Intel's "2014 Desktop Roadmap Direction" and stand out since they are apparently offered without a complimentary "standard issue" version of the processor design. This shift signals a possible recognition by Intel management that it needs to change "standard issue operations" to some extent in order to regain substantial profit margins and earnings.

Apple's (NASDAQ:AAPL) updated 13 and 15-inch MacBook pros are equipped with powerful Intel processors. In the near term, this is good news for Intel. Apple's products typically sell well, and will certainly boost Intel's processor sales and demand from Apple and other potentially interested technology companies. Intel's graphics processors also boost the company's profile in conjunction with the anticipated success of Apple's new MacBooks.

Intel continues to make aggressive investments in other businesses and their R&D programs. Recently, the company invested $65M in technology firms around the world. Intel is focused on data center development, the all-important mobile market as well as increasingly prominent cloud computing services and products.

Net operating income data is discouraging. FY 2012 net operating income was 11.15B, down 14.56 percent from the previous year's 13.05B. FY 2010 net operating income was similar to the FY 2012 amount at 11.81B. In the same time frame, the cost of revenue as percentage of total revenue increased from 34.69 percent in FY 2010 to 37.85 percent in FY 2012. Though the increasing cost of revenue is not large, it is persistent and does not elicit hope in management's ability to control costs. Between FY 2009 and FY 2010, operating income nearly tripled from 5.71B to 16.06B. Since then, operating income slid to 14.74B in FY 2012. Net margin likewise decreased from a high of 26.3 percent in FY 2010 to 20.6 in FY 2012, with current TTM net margin projected to be 18.8 percent.

Risk Analysis
Intel operates in an environment rife with potential unexpected research breakthroughs and innovations from many competitors. R&D expenditures do not easily yield to straightforward ROI analysis, especially in the near term. Heavily cutting R&D is just as hazardous for Intel as excessive spending on research that does not pay off.

Advanced Micro Devices (NASDAQ:AMD) has been losing to Intel on several important measures. In the most recent quarter Advanced Micro Devices has 1.06B in total cash. This is a whopping 29 percent of Advanced Micro Devices's enterprise value. By contrast, Intel has 19.15B in total cash, 18 times as much as Advanced Micro Devices. Moreso, Intel's most recent quarter total cash reserves are 16.9 percent of its 113.31B EV. This means that Intel has much more of its money invested in operations or investor reward compared to Advanced Micro Devices.

Texas Instruments (NYSE:TXN) is another Intel competitor. It is bigger than Advanced Micro Devices, with the most recent company EV valued at 46.75B. In the most recent quarter, Texas Instruments had 3.24B in total cash, only 6.93 percent of EV. This cash/EV ratio hints that Texas Instruments uses its assets more efficiently than Intel and Advanced Micro Devices.

Despite Intel's market dominance and past success, the company can, at best, merit a "Hold" recommendation. Intel's dependence on the PC market is a substantial liability. Its expenses are rising and leading to steadily increasing cost of revenue and decreasing net margins. Market competitor Texas Instruments seems to be a better opportunity for new investors looking to get into the technology sector.

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.

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