Should you Give up on Intel?
Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Intel’s (NASDAQ: INTC) lowered growth outlook didn’t come as a surprise to me. The company had earlier predicted that its full year’s revenue would grow in the high single digit percentage. But recently, along with its second quarter results, the chip giant revised its growth estimate to about 3% to 5%. Many saw this coming when International Data Corporation (IDC) recently revealed stats indicating a slight decline in second quarter worldwide PC shipments by 0.1%. Even chip rival AMD (NYSE: AMD) hinted (to say the least) at a slowdown when it reported a slump in second quarter revenue by 10% and an even more catastrophic 40% fall in profits on the back of poor sales performance in China and Europe.
Thankfully, in contrast, Intel released somewhat better quarterly results. Revenue rose a little to $13.5 billion, mainly due to a good increase in sales in its data center group, though net income dipped slightly to $2.8 billion.
So why did Intel lower its forecast?
Well, first of all, the global economy isn’t doing great. The euro zone seems perennially stuck in an economic crisis, which in turn seems to be dragging down the US economy with it. While much of the quarterly earnings reported by US companies have made it through expectations, there is a clear trend of significant cuts in third and fourth quarter estimates - something we haven’t seen since 2008. Could this portend another recession?
Well, many analysts are of the opinion that we could be staring at a possible US or global recession by 2013. This may be backed by the fact that analysts, on average, cut their outlook on 792 different companies and raised expectations for merely 232 of them. Even worse, most of these cuts are in the technology sector.
Along with this, there are other obvious factors to take into account as well. Consumers are increasingly preferring tablet devices like Apple’s highly popular iPad that does much of the stuff a person would do on a regular computer. And since Intel makes most of its chips for computers, it is now faced with a slowdown in demand.
So what lies ahead for chipzilla Intel?
Well, thankfully the company isn’t taking things lying down. Intel might be going crazy over the Ultrabook with as much as 140 designs based on the "Ivy Bridge" platform, of which many would have touchscreen capabilities, but it is leaving no stone unturned. The company is actively looking forward to entering the smartphone and tablet device arena with some of its newer processor chips that would run on tablet and smartphone devices. And as demand for computer chips weaken, Intel is able to free up more of its manufacturing capacity for next generation mobile processors.
Given that Intel has its own manufacturing facilities and access to a lot of financial resources, the company can invest a great deal in research and development to contend with other less powerful fabless semiconductor companies. Take for instance, Qualcomm (NASDAQ: QCOM) and NVIDIA (NASDAQ: NVDA). The two chip makers are currently facing issues with manufacturing the latest generation 28-nanometer based chips because of production issues at their foundry partner Taiwan Semiconductor Manufacturing Corporation. This is in contrast to Intel’s already firm grip on manufacturing even more technologically advanced 22-nanometer based chips.
However, things aren’t going to be that easy...
With most tablets and smartphones running on ARM’s (NASDAQ: ARMH) processors, Intel would need to do a lot more to make significant inroads into the mobile arena. That should become a lot easier when Microsoft releases its newest Windows 8 operating system which includes customization for tablet PCs and runs on the time-honored x86 architecture. Besides, the new operating system would spur growth in the traditional PC chip business as well.
Should you give up on Intel? No way dude!
The company is well poised to make changes in its strategy concerning mobile and PC chips in a very dynamic way, which makes it quite attractive for the long haul.
kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Intel, Microsoft, and Qualcomm. Motley Fool newsletter services recommend Apple, Intel, Microsoft, and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.