Is Intel Broken?

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

Over the past six months shares of technology giant Intel (NASDAQ: INTC) are down more than 20% as market worries about their ability to survive in an increasingly mobile world.  They’ve also reduced guidance for the year to reflect current economic weakness.  Once mighty Intel is now trading at less than 10 times earnings as the market ponders whether the company is on the wrong side of several key trends.  Is Intel broken or can they survive and possibly thrive under the new normal?  To answer this question let’s see what a SWOT analysis of Intel turns up.

Strengths

Intel is still the dominant player in the microprocessor market by a wide margin.  They hold an incredible 80% share of this $30 billion market with Advanced Micro Devices (NYSE: AMD) picking up the balance.  This has afforded them the ability to maintain rather generous margins which they’ve used to fuel two additional strengths.

Intel has a solid balance sheet with $6 billion of cash and short term investments against $7.1 billion of long-term debt.  They don’t have quite the cash hoard as some of their peers in part because they fund a very generous 4.1% dividend (which equates to more than a billion dollars a quarter).  Funds that are not returned to shareholders via the dividend or though their share buyback program are plowed into their massive R&D spend.  The followong chart shows their commitment to reinvesting capital through their R&D program:

<img src="http://media.ycharts.com/charts/4b765a114e4130c636479aaab35ab692.png" />

INTC R&D Expense Quarterly data by YCharts

Another way they are doing this is through their $4.1 billion R&D and equity investment in ASML Holdings (NASDAQ: ASML).  Of that total, about a billion dollars will be funded through increased R&D spending over the next five years, while the balance of the investment will give Intel a 15% stake in the company.   This investment increases the cooperation between the two companies while accelerating technology transitions by up to two years, which enables Intel to maintain its dominate position in the industry.

Weaknesses

The big rub against Intel is that they are late to the mobile market, which is now dominated by ARM Holdings (NASDAQ: ARMH).  The problem is that Intel’s chips are dependent on a constant power source, and if you have a mobile device, remembering to plug it in is a constant battle.  ARM offers mobile makers the power savings their customers crave while providing just enough speed to keep customers happy.  This enabled ARM’s chips to gain fairly wide scale adoption while Intel has been scrambling to keep up.

Opportunities

That weakness in mobile is where their greatest future opportunity lies.  Their new Atom line is designed to offer processing power while conserving battery power.  They’re spending big bucks to build out their mobile platform, having acquired a large patent portfolio from InterDigital while picking up Infineon’s wireless solutions business last year.  The mobile market is massive and growing quickly and is one that Intel cannot be shut out of if they expect to grow.

The lock that ARM Holdings has on the market is one that Intel would like to break, and winning Apple (NASDAQ: AAPL) away from them would go a long way.  They already supply Apple with chips for their Mac products, and if they can demonstrate the perfect blend of speed, power efficiency and value with a future iteration of their Atom chips, it could set them up to dominate this market as they do most markets where they operate.

Finally, we can’t overlook their acquisition of McAfee and the potential in the cyber security market.  Right now mobile has the openness of the Wild West and by adding a layer of security through their products it could give Intel the upper hand.  This could be their key to winning at mobile.

Threats

Right now Intel is at the whim of the global PC market, which is driven largely by both the economy and the PC upgrade cycle.  Right now economies across the world are slowing down and recent headwinds have caused Intel to cut guidance for the year.  Further deterioration of the global economy, especially in emerging markets, could really hurt Intel.

Not only are they threatened by the economy, but competitors like ARM and AMD are not sitting idly.  In the past AMD has pulled close to Intel in terms of both power and performance and they could do so again if Intel’s focus on mobile causes them to drift in their core competency.  Finally, ARM isn’t content to just dominate mobile, they have their eyes on Intel’s bread and butter, the server market, as well.  If they begin to gain traction it could be cause for some serious concern.

Bottom Line

Intel is far from broken as they have the financial and intellectual firepower to dominate any market they set their mind on.  I firmly believe it’s only a matter of time before they begin to make waves in the mobile market, and I would not be surprised to see their chips eventually make it into a future Apple iDevice.  Patent investors will be greatly rewarded by Intel as they begin to seize the opportunities in both mobile and security.  In the meantime, they can enjoy the very secure 4% dividend.

Want to Learn More on Intel?

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel will find itself in a precarious long-term situation if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand regarding the chip giant. Better yet, you'll continue to receive updates as news develops for an entire year. Click here now to learn more.


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