These Stocks Will Bring You Happiness (And Capital Appreciation)
Robinson is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Semiconductor corporations have to be dynamic for them to adapt to ever-changing customer needs. Intel (NASDAQ: INTC) is regarded as the leading chip manufacturer because of the hegemony imposed in the computer markets. Advanced Micro Devices (NYSE: AMD) is another chip manufacturer that provides cheaper solutions to customers on the low end of the price spectrum.
Even though these companies have monopolized the computer business for the last decade, the invention of the tablet caused a severe decline in PC sales and brought serious headaches to several companies. How are these companies vindicating the decline in PC sales?
Chips for different products
Intel continues to nearly monopolize computer processing with its Core-I chips. Although they are more expensive than AMD A processors, they offer faster performance. The company has been trying to expand to other markets to offset the loss of revenue from the PC section.
According to StarCounter, a software that checks operating systems used to access certain websites, only 4% of users utilize Windows 8, developed by Microsoft (NASDAQ: MSFT). For the same period in 2010, StarCounter reported that 11% of the users had Windows 7. Overall, there is strong evidence that Windows 8 has not been received by customers with the positive interest that was originally expected.
I believe part of the problem of declining PC sales was the significant number of changes from Windows 7 to Windows 8. Consumers are finding difficult to adapt to the new OS, and the first question asked is: "Where is the Start button?" Windows 7 was acclaimed because the interface remained, essentially, the same since Windows 95, only more stable and efficient. Microsoft needs to reinvent itself and come up with products that are a success. Until this happens, revenue aren't likely to increase until the Xbox One is released.
The Xbox One is expected to be the ultimate gaming and multimedia machine, which will incorporate voice recognition through Kinect, incorporation of digital cable television, and internet-based app capabilities such as Skype. The company has reinvented what customers perceive as a simple video gaming console. I expect the Xbox One will have better reception than the Xbox 360, and Microsoft's revenue should rocket upward.
Microsoft trades with a P/E of 17.2, slightly below the industry’s average of 18.6. Revenue rose 10% to $20 billion, and net income rose by 20% to $6 billion. This stock would be suitable in an income-oriented portfolio.
Going back to Intel, the company needs to expand its markets to mobile devices. So far, it has done fairly well adapting to the tablet industry. Although it is late to the party, with Apple and Samsung settled in the market, Intel is trying to take some market share through Windows 8 tablets. The new Intel Core processors consume as little as seven watts, which bodes well as thinner and lighter tablets are developed. The company’s sales will be driven forward as Intel adapts to new markets such as tablets and smartphones.
From a valuation standing, the stock trades with a P/E of 12.0, well below the industry’s average of 21.4. Its revenue declined in the last quarter by 4% to $12.5 billion, and its net income shrunk by 25% to $2 billion. However, cash from continuing operations rose by 35% to $4.2 billion, and its free cash flow rose by $2.1 billion to $2 billion. A strong free cash flow opens the possibility for a dividend jump. The last time the dividend was hiked was in May 2012. Investors should wait for another hike any time soon.
This one is tackling different markets
AMD is taking a slightly different approach to boost revenue. The chip manufacturer will supply AMD A8 processors to Xbox Ones and Playstation 4s. Although I am confident the Xbox One will be a blockbuster, AMD does not really care.
Its revenue will increase regardless of consumers’ preference for one console over another. This alone will boost AMD’s profits to sky-high levels. However, the company should continue to develop faster and more reliable processors so it does not lose contracts when updates of the consoles are developed.
In addition, AMD is developing high-end video cards and chips for computers. This division shares profits with nVidia, the other major player in the video card industry. This section provides solutions for demanding customers with high needs in video editing or gaming. On the positive side, newly developed games require higher video card capabilities. Therefore, gaming-oriented customers have to constantly upgrade their video cards, which sometimes run up to $500. I expect the demand from these customers to stay strong, since everybody loves to play a good video game every once in a while.
From the business plan point of view, the company is expanding operation margins. Even though revenue shrunk 30% to $1.0 billion in the last quarter, the net loss narrowed from $590 million to $146 million. I would recommend acquiring this stock as a growth play that will most likely be profitable for investors.
My two cents
Intel and AMD are trying to adapt to other markets as PC sales continue to decline. Intel is delving in the tablet and mobile markets by powering Windows 8 tablets and cellular phones. AMD will supply chips to the Xbox One and Playstation 4, which are likely to boost the company’s sales. Finally, Microsoft may win the console battle against the Playstation 4 by creating the ultimate multimedia console in the market. Not only is it targeted to gamers, but to non-gamer customers, too. For these reasons, I would recommend buying these stocks as a basket to create a blend of income and growth.
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 finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, a Motley Fool analyst runs through all of the key topics investors should understand about the chip giant. Click here now to learn more.
Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!