Why This Company Needs To Have a Good Look Inside

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

There’s really nothing new about Intel’s (NASDAQ: INTC) earnings report because everyone was expecting something like this anyway. This is what actually happens when your core business starts taking a major hit and fades into obsolescence. But, Intel’s battling disappointment with aggression, as it jacks up investment (spending around $13 billion) into plant and equipment even more in the coming quarters. While it’s true that sometimes companies do need to follow a policy where ‘today’s pain is tomorrow’s gain,” there’s no denying the fact that investors are getting really jittery about the whole situation.

This planned investment by Intel is almost entirely directed towards the ability to produce more chips while keeping the production run intact. That’s cost-saving coupled with greater production capacity from its fabs. And since there’s little hope left for the PC industry to revive, we can obviously visualize that Intel is looking at gatecrashing into the smartphone and tablet party in a major way. But the question remains – is there sufficient demand to keep up with these lofty expansion plans? To put things into perspective, Intel has displayed such aggression in the past and actually benefitted from it. But then, these strategies worked for the company at a time when the PC market was still going strong.

In my eyes, Intel is somewhat similar to another tech giant Oracle (NYSE: ORCL). Both these companies are perceived to be ‘mature’ and relatively “slow moving giants.” While Oracle has witnessed the rise of smaller competitors like Salesforce.com and Workday that are eating into its market share, apart from arch rival SAP AG, Intel’s greatest headache has primarily been ARM Holdings (NASDAQ: ARMH). But, that’s where the comparison ends. Oracle has successfully adapted itself to cater to the cloud-based business by undertaking a string of acquisitions and ramping up its software suite. Intel has yet to display a clear-cut strategy to investors. It’s true that the company does have a lot of money, but investors have every right to feel that given the huge planned investment, dividends and share buybacks will start to lessen from now. No wonder then that the company’s stock prices are on a downslide.

If you look at the larger picture, Intel has a big disadvantage compared to ARM Holdings, which is primarily not because of technology but because of the cost factor. The fact that Intel is big enough to have its own fabs is something that may actually work against the company in the long run. One, fabs are not cheap to maintain and two, there has to be a robust market for the chips they produce. On the other hand, ARM Holdings still has this unparalleled revenue model where it just licenses its chip designs to companies such as Qualcomm and NVIDIA.  That also means ARM does not have to own and maintain its own fabs, or even get into sourcing agreements with chip manufacturers like Taiwan Semiconductor Manufacturing Company (TSMC).

To sum it up, there is a distinct lack of steam in Intel at this moment. The company had banked a lot on the Windows 8 roll-out, something that was at best a limited success. ARM and TSMC are closing in, one on the design and the other on the manufacturing front. And I really don’t share CEO Otellini’s reliance on Ultrabooks. Apart from the fact that an Ultrabook is still more inconvenient to carry than a tablet, it is still a highly expensive niche product for most people on the planet, especially those living in emerging nations – the tech market for the future.

It’s true that Intel is doing all it can to build more efficient and less power-hungry chips targeted at smartphones and tablets, but it may be quite some time before it acquires ARM’s formidable reputation as the global no. 1 choice for chips meant for such products. Intel’s chips are already perceived as more expensive by the market, and the huge investment plans will do nothing to reverse that image. Otellini’s planned investments may certainly lower costs in future and stabilize the bottom line, as Cody Acree at Williams Financial sums it up so well, but growth still seems far, far away. Fool on! 

subhadeeptech has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Oracle.. 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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