Will the Ultrabook Put This Chipmaker Back in the Game?

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

The recent announcement of Berkshire Hathaway to pull out of its investment in Intel Corporation (NASDAQ: INTC) only a year after making its initial investment wasn’t a big vote of confidence in the world’s largest semiconductor. Besides this news, the recent quarterly reports didn’t show much growth and the forecasts for the ultrabook might be lower than initially anticipated. Will Intel be able to turn these news items around and rally by the end of the year?

Financial Reports

The recent second quarter financial reports of Intel didn’t show much growth as its quarter revenues grew by only 4.6% from the previous quarter and by 3.6% from the parallel quarter of 2011. On the other hand, the company’s operating profitability has declined to 28% compared with 29.5% in Q1 2012 and 30% in Q2 2012. The decline in profitability and the low growth rate in sales and profits suggest that Intel’s growth is low compared to other high tech companies. As a comparison, one of Intel’s arch-rival, ARM Holdings (NASDAQ: ARMH), is growing by a much higher pace: in the second quarter of 2012 the company’s revenues expanded by 15% compared to the parallel quarter of 2011 and its operating profit grew by 48%. Further, the company’s operating profitability reached in the second quarter of 2012 nearly 62%.

This means the Intel needs to find additional ways to expand its operation in order to renew its growth. One of the company’s plans is to expand its operations via the ultrabook. The ultrabook was supposed to compete in the PC market, which Intel already has a strong hold so this strategy didn’t seem to contribute much to the company’s growth.  The new ultrabook, however supposed to compete in the tablet market, a market in which Intel hasn’t put a dent yet. The new ultrabook is expected to come out in 2013 and will include voice recognition, screen touch and many more tablet/Smartphone like features. Nonetheless, I think that as long as there is a keyboard attached to the product, even though the keyboard could be popped off, it will be hard to sell it as a tablet and people will still find it more as a laptop than a tablet.

But we will still have to wait and see how the market will react to this product. Based on the ultrabook success up to now and similar brands that have tried to enter the tablet market, such as Amazon’s kindle fire, it doesn’t look good. 

There are some positive reports that Intel may collaborate again with Microsoft (NASDAQ: MSFT). Up to now most of the PCs have used Intel's chips and the strong relation between the two companies has been a mutual benefit. Intel has recently unveiled the new chip, clover trail, for Windows 8 tablet. This new product to be integrated with Microsoft's Windows 8 is supposed to come out in October. There are reports that Asus and Samsung will come out with Windows 8 and Intel's chip. If these tablets will succeed it could bring Intel into the tablet market.  On the other hand, according to Intel's CEO, Paul Otellini, Microsoft's Windows 8 isn't ready yet to be released next month. If there will be a delay in the release it could affect not only Microsoft's sales but also Intel's.           

Nonetheless, the low growth in the company’s profits and the departure of Berkshire Hathaway from the company may have contributed to the drop in the company’s stock. As seen in the chart below the company’s stock has been falling in recent months. As a result the company has underperformed the NASDAQ during the year-to-date.

Economic Climate

The slow growth in the main economies including U.S – the U.S GDP expanded by only 1.3% in the second quarter of 2012 – and Europe may have also been a factor that affected the company’s growth. Further, the recent depreciation of the US dollar may have also been a factor that adversely affected the company’s revenues and earnings.

Some Final Thoughts

Intel hasn’t done well in recent months in the stock market and there are some negative signs for the company including its decline in growth, and low profitability compared to its competitors. But not all is bad, the new ultrabook might turn out to be a good bet for the company and finally put Intel into the tablet and Smart-phone market. I’m still skeptic if this bet will turn out well for the company, but when it comes to market trends no one can predict what will be the next big thing, which might be ultrabook.          

For further Reading: Is Exxon Due for a Rally?

Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

Interested in Additional Analysis?

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