Why Aren't These Stocks a Good Investment Right Now?
Robinson is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The computer industry is under huge pressure. When the Apple iPad debuted, the digital world took off on a different path. During the last decade, Intel (NASDAQ: INTC) and Advanced Micro Devices (NYSE: AMD) were kings in regard to processor design and marketing for personal computers. While both were good, Intel offered better solutions than AMD in terms of processing speed, though this came with a premium cost. AMD managed to survive the war because it offered budget chips that were nonetheless good performers.
Now, everything has changed. Customers have moved towards tablets because they are more convenient for general-purpose tasks such as browsing the web, reading, and even editing files. The demand for PCs is weakening, and Intel and AMD have struggled to maintain their profitable status.
Intel has reported declining revenues and net income. Its revenue for the three months ending on June 29th fell by 5% to $12.8 billion. Its net income decreased by 30% to $2 billion, or $0.39 per share, compared to $2.89 billion, or $0.54 per share for the same quarter a year ago.
There has been a downward path in revenues from Intel for several quarters now. The company stated that notebook platform volumes decreased by 7% from the second quarter of 2012 to the second quarter of 2013. Furthermore, notebook prices fell by 3%. I fear these metrics will continue to drop in the near future as the iPad and other tablets such as those from Samsung grow cheaper as production costs decline.
Desktop processors sales may not be as affected as notebook processors. In general, desktop computers are able to perform many more tasks than tablets at higher processing speeds. Intel stated that desktop platform volumes decreased by 5%, and average selling prices declined by 6%.
With weakening PC sales, Intel's business is maimed. Several analysts estimate that the popularity of tablets will increase in the near future. For this reason, investors should bail out of Intel and look for other investment opportunities. Intel should diversify and aim for other markets before investors consider committing their money in the chip-maker.
Intel is trying to diversity to the tablet industry. A benchmark has appeared online measuring the performance of the Intel Atom "Bay Trail" chip. Evidence suggests that it is 30% faster than the fastest ARM chip on the market, the Qualcomm's Snapdragon 800. The chip is due to come out in the second half of 2013, probably in the fall. Therefore, investors may want to wait until the first quarter of 2014 to determine how well the chip was received by customers before investing in Intel.
If hardware is bad, software may also be bad
Intel’s earnings report should sound an alarm for Microsoft (NASDAQ: MSFT) investors. The vast majority of the PCs sold use Microsoft Windows as an operating system. If the PC sales slowed down by 5% in this quarter, chances are that Microsoft’s revenues will come short in the following quarters.
The software giant is trying to offset the decline in PC sales by releasing updated versions of its Windows product. There is strong evidence that Windows 8 was not accepted as anticipated, however. According to several websites that track the user operating systems, the percentage of users who have adopted Windows 8 is significantly lower for the same period compared to Windows 7.
As a personal anecdote, last month I went to Best Buy to buy a laptop to continue my writing hobby. I must say that I was lucky enough to find a Windows 7 laptop. Windows 8 seems to be complicated enough for me to be scared of. Perhaps I will migrate to Windows 8 eventually, but users like me have been accustomed to the same platform since Windows 95. A sudden jump to a completely different platform is not easy.
Microsoft has realized that this may be a cause for users not migrating towards Windows 8, and it has announced a new update to the OS named "Windows 8.1." Perhaps with this blend OS between Windows 7 and Windows 8, users might finally buy the new product.
Until that occurs, however, investors should steer away from Microsoft as well. This doesn't mean that the company is doing poorly, it just lacks growth potential at the moment. According to the company's most recent quarterly earnings report, its revenues increased by 10% to $19.8 billion. Its net income increased to $4.9 billion, or $0.56 per share, compared to a net loss of $490 million, or $0.06 per share a year ago.
This company is diversifying
AMD has decided to tackle other markets. The chip-maker will provide processors to Sony's new PlayStation 4 gaming console and Microsoft's new Xbox One. This should help to offset the decrease in revenue from its PC chips side.
AMD still has the advantage of providing cheaper solutions for PC processors compared to Intel. Although the processing speeds are not as high, its budget prices are appealing for the low end of the price spectrum.
In brief, investors should expect to see increasing revenues in the first quarter of 2014, since the Playstation 4 and the Xbox One are scheduled to be released by the end of 2013.
AMD reported decreasing revenues in the last quarter, dropping from $1.58 billion to $1.08 billion. Due to lower costs of operation, however, its net loss shrunk considerably from $590 million to $146 million.
My foolish two cents
Intel needs to explore other opportunities because tablets are killing the PC market, especially the notebook section. Microsoft is betting heavily on its Windows 8.1 update. If it is appealing enough, I have no doubts that users will migrate towards the new OS. Investors should hold off until there is evidence that points that way, however. Finally, AMD may have an edge over Intel because it will provide the processing chips for the Playstation 4 and the Xbox One.
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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!