Why I’m Doubling Down on This Cheap Tech Giant

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Three months ago I recommended writing an October $25 put on Intel (NASDAQ: INTC) in my “No Drip, No Mess” virtual portfolio.  I did this in order to buy shares cheaper and if nothing else earn some income while trying.  That Intel trade was intended to be the first of many as I built up a position in the company that generates both dividend and option income for years to come. 

What’s New?

Since that first recommendation there have been a couple minor news items of note.  The big announcement that put pressure on the stock price was when they lowered their third quarter revenue outlook.  In the release they stated that they were reducing expectations from $13.8 to $14.8 billion all the way down to a mid-point of $13.2 billion.  They saw customers reducing inventory as well as softness in the enterprise PC market and slowing emerging market demand.  It’s not really surprising that they lowered their outlook as the global economy continues to sputter. 

The other news of note is that they completed their acquisition of 1,700 patents and patent applications from InterDigital (NASDAQ: IDCC) for $375 million in cash.  For InterDigital it was another step in their push toward monetizing their intellectual property.  InterDigital had been stumbling in their effort to monetize the company's assets with a rumored sale that ended without a buyer and they still haven't been able to convert a large scale sale or licensing agreement for their vast array of communication patents.   For Intel though it was another step into mobile as the patents cover 3G, LTE, and 802.11 technologies. 

If Intel is going to regain Wall Street’s favor they need to make further strides in that key growth segment.  They’ve already sewn up market leadership in many of their other markets and have an 80% + share over their top rival Advanced Micro Devices (NYSE: AMD).  Part of this leadership is because they not only design their chips but they own the manufacturing while AMD contracts that out.  Over the years this control has proved to be a durable competitive advantage for Intel.

They’re striving to develop a similar dominance over ARM Holdings (NASDAQ: ARMH) in the mobile chip space.  The prized customer of course is Apple’s (NASDAQ: AAPL) and their bevy of devices.  Intel already has a foundation to build upon the relationship as Apple already uses Intel chips in their Macs.  If Intel chips were ever to be selected over those from ARM holdings for a next generation iPhone or iPad it certainly would vindicate all the revenue being pump back into their R&D program.  That annual R&D expenditures are already more than the combined revenue of both ARM Holdings and AMD. Don't believe me, check out these two charts:

<img src="http://media.ycharts.com/charts/e0121346886fef1c7fb275b0d9ae4f65.png" />

INTC R&D Expense data by YCharts

<img src="http://media.ycharts.com/charts/44fe04b827ae79f0adb8546355beb19a.png" />

INTC Revenue data by YCharts

That R&D spending is what's been creating a durable competitive advantage at Intel and as you can see by the increase in sales has been yielding results.  Not only have they been investing heavily in the space but as the InterDigital deal shows, they’re not afraid to spend to acquire new technologies.  However, even if they never make more inroads into the mobile space, it’s not a thesis altering problem for Intel as there is still plenty of money to be made in their core chip and microprocessor market places.  While tablets and other mobile devices might replace some PC usage, it won’t completely eliminate them from the marketplace.  There are still many tasks that will still require these machines and therefore plenty of revenue for them to continue to earn.

The Trade:

Because of how much confidence I have in Intel’s future to continue to deliver I’m doubling down on my Intel stake.  That’s why even though that first Intel trade is still a month away from expiration I’m taking advantage of recent weakness in the shares to recommend this complimentary trade.  This time I’m recommending moving the strikes down by writing a January $22.50 put which lately can be done for about a $100 per contract.  That’s about a 4.5% yield while also potentially netting shares about 3% lower than their current price.  If assigned share’s I’d lock in a dividend yield of about 4%. 

latimerburned owns shares of Apple and has the following options: Apple and Intel. The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services recommend Apple and Intel. 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.

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