Why I’m Tripling Down My Bet on This Cheap Tech Titan

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

I’m sure you know the old saying that it takes two to make a market.  That market as you well know is all about supply and demand and right now there are more investors who want to sell their shares of Intel (NASDAQ: INTC) than those who are buyers.  Add in some good old fiscal cliff fears and another helping of a European flaring up and shares of Intel now trading very close to their 52-week low of around $20 a share. 

I think that price is just too good to pass up given the fact that the business of Intel is far from dead.  That’s why I’ve decided to triple down on the Intel position in my virtual “No Drip, No Mess” Portfolio. I think that over the long term this bet will pay off handsomely after the market’s current mood shifts and investors realize that Intel is still a great company to own.

My position in the company started after I bought shares of this tech giant by writing October $25 puts, which were assigned, and I subsequently doubled down by writing January $22.50 puts, which I think are also likely to be assigned.  This time I’m again turning to writing puts on Intel, and specifically I’ll be writing a February $20 put, which can recently be written for around $105.  These nearly in the money puts provide a 5.25% yield for the capital at risk over the next three months.  If I’m successful in being assigned Intel on this round of put writes, I’ll be locking in a 4.5% yield on the tech giant. 

Further, if both this put and my January $22.50 strike put are assigned, it will bring my total exposure to Intel up to 6.75% of the portfolio’s starting capital.  For me this is a fairly outsized position and by far the largest I’ve recommended in my virtual portfolio.  I think the rewards far outweigh the risks and that in time I’ll be greatly rewarded for this decision.

The risks, however, cannot be understated and they represent the main reason for Intel’s fall.  Competition is fierce and while they do seem to have main rival Advanced Micro Devices (NYSE: AMD) firmly under control by claiming an 80%+ market share of their core microprocessor market, that’s not what has investors concerned.  That concern is in mobile and it’s a concern that has the future of AMD so muddied by the advent of both tablets and smartphones that the company is now beginning to explore their options, which could include a sale of parts or even the whole company. 

The real pressure for Intel isn’t yet in their core market but they, like AMD, are struggling to compete in a growing mobile world.  This world is now dominated by ARM Holdings (NASDAQ: ARMH), who incidentally is looking to grow into other core markets such as Intel’s server microprocessor business.  What really seems to be worrying investors is that ARM could take their mobile dominance and begin to encroach on Intel’s other markets.  If that happens then Intel it could be in real trouble.

However, I don’t think that Intel would take threats to their core market without fighting back in a big way.  There is a key difference in how these two companies operate and I put the competitive advantage firmly on the side of Intel.  That advantage is that Intel owns its manufacturing facilities as opposed to turning to third-party manufacturing foundries.  This enables Intel to invest in the latest processes and leverage that to produce superior products.

ARM Holding takes a different route as they instead license and then collect royalties on their technology from myriad of companies.  Their business is one of high margins as actual manufacturing is outsourced.  They are growing their licensing base rapidly, having added 74 new licenses already in 2012 and the total count stands are 375.  The only real problem, at least for investors, is that the company is trading at an insanely rich valuation of more than 225 times earnings, which are only expected to grow at 18% annually for the next five years. 

Still, they are a long way from making a play into Intel’s core market and Intel hasn’t completely ceded the mobile market to them either.  The fight is far from over and Intel has the firepower to hold off ARM as they have from AMD. 

All that being said, from an investment standpoint, Intel isn’t the growth story or a margin story. In my opinion it’s a value story.  At less than nine times earnings they are trading under their five-year projected growth rate.  Any news that the PC is not dead or that Intel will at least survive should send shares much higher.

Let me be clear, I’m not a long-term Intel bull as they have yet to make any traction into mobile and their core market appears to be on the decline and about to face new competition.  However, I think that Intel offers a very low-risk income opportunity with some decent upside.  That’s more than enough reason for me to want to triple down on this cheap tech titan. 


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

blog comments powered by Disqus

Compare Brokers

Fool Disclosure