Why You Should Still Invest in This Semiconductor Company

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

A secular shift from PCs to tablets has been really tough for almost every company in the PC industry, whether they are in Software or Hardware. This difficulty in adapting to the new scenario has often raised questions about the capabilities of the managements of these companies. The latest entrant in this list is Intel, which has announced that its CEO Paul Otellini will retire in May 2013, three years before his mandatory retirement. This announcement came after the CEO faced criticism for not equipping the company with the necessary tools to manage this shift.

This news can make some of investors feel that the company is not a safe investment anymore. But, before coming to any such conclusion, we must have a look at how other players in the industry have been performing and what actions Intel is taking to overcome this headwind.

Let’s see the financial figures of Intel and its peers:

<table> <tbody> <tr> <td> <p><strong>Company Name</strong></p> </td> <td> <p><strong>Operating Margin</strong></p> </td> <td> <p><strong>PEG (5 Yr Expected)</strong></p> </td> </tr> <tr> <td> <p><strong>NVIDIA </strong><span class="ticker" data-id="204770">(NASDAQ: <a href="http://caps.fool.com/Ticker/NVDA.aspx">NVDA</a>)</span> </p> </td> <td> <p>15%</p> </td> <td> <p>1.27</p> </td> </tr> <tr> <td> <p><strong>Advanced Micro Devices</strong> <span class="ticker" data-id="202799">(NYSE: <a href="http://caps.fool.com/Ticker/AMD.aspx">AMD</a>)</span></p> </td> <td> <p>-7%</p> </td> <td> <p>-0.93</p> </td> </tr> <tr> <td> <p><strong>Intel </strong><span class="ticker" data-id="204036">(NASDAQ: <a href="http://caps.fool.com/Ticker/INTC.aspx">INTC</a>)</span></p> </td> <td> <p>30%</p> </td> <td> <p>0.81</p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

AMD could never be a threat to Intel.  The company has been losing market share in both the Server and PC categories; in the PC category, AMD lost 3% of its market share in 3Q12, and also lost 0.3% market share in the Server segment.  The company recently announced its restructuring plan, which is expected to generate ~$20 million in 4Q 2012 and ~$190 million in 2013. Also, to tap the Windows 8 market, it launched its Z-60 (Hondo) processing unit, which is expected to offer higher processing speed and  compatibility with Windows 8 and Windows 7. This processor is expected to compete with Intel’s Clover Trail Atom processor for Windows 8. Although AMD is making some efforts to regain its lost market share and improve its financial position, these efforts are not looking sufficient to lift its share in the near future.

On the other hand, NVIDIA is looking promising with its operating margin of 15% against -7% for AMD. It has a presence in both the PC market (~5% market share) as well as the fast growing Tablet market (~15% market share). However, the company is facing some challenges with slow sales of Windows RT, which uses NVIDIA Tegra app processor.  Its operating expense continues to increase, thus offsetting its gains from the higher margin Tegra products.  Also, the company’s heavy reliance on just one big supplier like TSMC can be risky sometimes. Its Mobile App Processor segment has been its main growth driver. But, the entry of bigger players like AMD and Intel into this market can restrict its growth in the coming time.

Looking at Intel, we can see the company facing some issues in the PC segment but its new innovative products and solid financials should provide the required support to it in the macro weakness in the upcoming time.  Let’s have an overview of its growth drivers.

Refreshing new Windows platform:

Microsoft recently launched two of its most awaited products: Windows 8 & Surface RT. Out of these, Surface RT could not produce the expected returns for the company, as it saw slow initial sales for this product.  This may not be good for NVIDIA because Surface RT runs on the ARM-based chip it makes. However, Windows 8 is the refreshing new addition to the windows OS series. This interface runs on both PCs as well as Tablets with improved performance, especially with the addition of the ‘Touch’ feature.  Windows 8 runs on the traditional x86 architecture chips, which only AMD and Intel produce.  Intel, with more than 80% market share in the microprocessor segment, is in the best position to exploit this opportunity. Intel is currently planning to launch 140 Ultrabooks based on Windows 8, and out of these ~30% will be on touch screen.

Improved Products:

Intel has some interesting products in the pipeline along with its recent launches, which will put the company aggressively in the front in almost every segment.

  • Motorola recently announced the launch of its Razr I, which uses the Intel Atom processor. This processor provides a speed of 2 Ghz and improved battery life. Before its launch, power consumption has been one of the main points of discussion among industry experts, but after this launch the company has successfully undermined these concerns. 
  • Other than mobile, the company is also expected to upgrade Ivy Bridge on its highly successful Romley server platform. Romley’s success has already been seen in Cisco 1Q13 earnings, which showed 51% growth in its Data Center Y/Y mainly because of its adoption of Romley based servers. This would help the company to get a larger market share in the Enterprise segment.
  • On the other hand, the company is also planning to launch its new generation processors,  Haswell. These products can provide the much needed support to the company in the slowing PC market.  They are also expected to offer ~2x performance of the Ivy Bridge and can provide significant power savings in ultrabooks.

Benefit from Acquisitions:

Intel’s acquisition of QLogic Corp.'s InfiniBand business & Cray Inc. will help it to improve its presence in supercomputers too. These acquisitions will also help the company to achieve Exaflops performance by 2018. Apart from these acquisitions, Intel recently purchased ~1700 patents from InterDigital, which are related to 3G, LTE and wireless technologies. These patents will help the company compete in the mobile segment in a better way.

Lastly, the company has a solid balance sheet, with a debt/equity ratio of 0.15 and a quick ratio of 1.65, both of which show the company's ability to manage short term liability. Furthermore, the company has a solid dividend yield of 4.40%. So, looking at its financials and its impressive newer products, I feel this stock is still cheap with a forward P/E ratio of 9.96. I would recommend buying this stock.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel and NVIDIA. 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!

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