How to Play This Chipmaker?

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

Intel (NASDAQ: INTC) used to be regarded as an innovative company and a powerhouse. Now with Apple (NASDAQ: AAPL) and Qualcomm (QCOM) thriving in the current challenging macroeconomic environment, and Intel facing the problem of too little demand for its products, many investors have become unhappy with the company over its growth.

Intel is the world's largest chipmaker, and makes a lot of money from its core PC and server x86 businesses. Its primary competitors are ARM Holdings (NASDAQ: ARMH)Advanced Micro Devices (NYSE: AMD), and IBM (IBM). Many Intel shareholders have suffered a string of indignities. If it is not too busy following its partner Microsoft (MSFT) in missing out on the transition from a PC to a mobile device world, it is lowering its quarterly guidance due to the harsh business environment. Just recently, a study of analysts’ recommendations at the major brokerages showed that Intel is the 26th broker pick, on average, out of the 30 stocks making up the Dow Jones Industrial Average, according to ETF channel. Within the broader S&P 500, Intel claimed the 377th spot.

Intel reported third quarter results that showed revenue of $13.5 billion. Its operating income was $3.8 billion. Its operating income was $3.0 billion, up 5% compared to the second quarter. The earnings per share was 58 cents, up 7.4% over second quarter figures. Intel generated $5.1 billion in cash from operations during the third quarter. The company paid dividends of $1.1 billion and used $1.2 billion to repurchase stock. "Our third quarter results reflected a continuing tough economic environment," said Paul Otellin, Intel president and CEO. "The world of computing is in the midst of a period of breakthrough innovation and creativity."

Intel Client Group revenue was $8.6 billion, down 8% year-over-year. Data Center Group revenue was $2.7 billion, up 6% year-over-year. The company's business outlook didn't include the potential impact of any business combinations, asset acquisitions, divestitures, or other investments that may be completed after October 16th.

Intel spent $11.4 billion on capital expenditure, significant when compared to $8.3 billion for Apple, $3.2 billion for Google (GOOG), and $2.5 billion for Microsoft.

Intel says the future of the company is the Mobile Internet Devices sector. While making a lot of money from its core PC and processor businesses, it will eye the booming mobile computing device space currently dominated by manufacturing partners such as Qualcomm, Samsung (SSNLF) and others. Intel wants to catch up with rivals as quickly as possible because of the anticipated slower growth and lower pricing of the PC market in the next five years.

Intel will also continue the progress it is making in Ultrabooks and phones, hoping to cash in on Intel-based tablets coming into the market. "Ultrabook push seeks to bridge the gap between traditional notebook computers and tablets," said Otellini. "Ultrabooks have all the computing power of a real computer, with the same instant-on capability and long battery life of a tablet."

But according to In-Stat, the next few years will be competitive for the Silicon giant as it seeks to grow its reach. Its expansion into the Mobile Internet Device market will extend its list of rivals. Since it manufactures accelerated processing units (APUs), Advanced Micro Devices will watch Intel's entrance to the field. Meanwhile, ARM will also be doing the same thing since its chip designs run in most smartphones and tablets. To place itself in a competitive position, Advanced Micro Devices bought low power server maker SeaMicro from $334 million in February, a deal which took away Intel's partner and gave AMD a greater presence in the booming micro server space.

To compound Intel's problem, rumors are surfacing that Apple wants to ditch Intel in the manufacture of Mac processors. According to Bloomberg, three anonymous sources say Apple is exploring leaving Intel's chips for its own in-house brand of A-chips that currently power iPhone and iPad. Though Intel's chips still offer the best performance in the industry, Apple wants to make the switch because it loves vertical integration. By using in-house chips, it will increase efficiency, boost margins, and give Apple more control over its destiny. Intel will be offended because the processor for A-chips is built on ARM-based designs that boost advantages in power efficiency.

In addition, Intel will be trying to catch up while facing a sluggish world economic environment at this point, especially in Europe, which is in recession. Unlike some of its rivals, Intel will be getting into the right business at the wrong time. With ARM interested in expanding its reach into PCs and low-power services, Intel could find competition stiff in all direction.

Though Intel is in big trouble, at least from Wall Street perspective, I don't think investors should sell the stock. Intel paid dividends of $1.1 billion in the third quarter, repurchasing stock with $1.2 billion. But I'm not recommending buying either. The companies that can best be compared to it are chip makers such as Advanced Micro Devices, Samsung Electronics, and Texas Instruments (TXN). Intel's price-to-earnings ratio is 9.18, which is more attractive than 19.18 for Texas Instruments and 20.70 for industry average. For new investors, Samsung may be more attractive than Intel due to its connection with Google's Android. Conclusively, at the current share price of $21, I recommend holding Intel, but do not recommending buying.

Know What You Own

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StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend 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.

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