Intel’s Hangover Continues in 2013: Buy or Sell?

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

Despite being one of the most influential companies in the entire tech landscape, the last five years have been a rocky ride for Intel (NASDAQ: INTC) .   

Even though the company still occupies a dominant competitive position in the PC sector, the hits just keep on coming for the Santa Clara, Calif.-based company. 

<img src="/media/images/user_735/investing_large.jpg" />

The numbers don’t lie either. In the last year alone, shares of Intel are down 19.75% compared to a 12.78% gain for the NASDAQ. 

So what exactly is weighing on shares of Chipzilla these days?

  • CEO Departure: Several weeks ago, Intel CEO Paul Otellini surprised investors by announcing his decision to retire and step down in May 2013. He took on the CEO role during 2005 and steered the company through many bleak moments, including the largest series of layoffs in company history.
     
  • Mobile Failures: Despite investing 10+ years and billions of dollars into mobile CPUs, the company has still yet to hit paydirt in this hot market. Intel has yet to earn any major design wins in smartphones and/or tablets. Samsung, Apple (NASDAQ: AAPL), Qualcomm (NASDAQ: QCOM), and other competitors continue to dominate the mobile computing market with seemingly no end in sight. Apple's popular mobile devices like the iPad and iPhone have taken over and cannibalized PC sales in the process. Qualcomm is the undisputed king of the mobile CPU market, which is a lucrative market that Intel still cannot seem to solve. 

  • Earnings Miss: Even worse, Intel’s Q4 financial results were below expectations and sent investors heading to the exits, as earnings dropped 24% year-over-year. Shares of Intel fell more than 5% following the gloomy report. From a financial perspective, the stagnant PC market is really starting to take its toll.
     
  • Eroding Margins: Gross margin, a long-time bright spot financial metric for Intel, dropped by a mind-boggling 6.5% to 58%. It’s not like the revenue side is much better either – for the full year, Intel’s revenues actually decreased 1.2% to $53.3 billion.

  • Higher Capital Expenditures: Despite sliding revenues and margins, Intel plans to spend $13 billion on new capital during 2013. When companies are growing profits at a fast clip and margins are expanding, investing in new capital makes sense … but it’s very risky to expand cap-ex so quickly when earnings and revenue are declining.

All of the factors above definitely point to a company that is going through a rocky transition period, but the cap-ex trends are perhaps the most disconcerting.

Intel maintains the largest network of semiconductor fabrication plants in the world and Otellini recently admitted that Intel is currently running their fabs at less than half their capacity

<img src="/media/images/user_735/fab2_large.jpg" />

So let me get this straight – Intel is using less than 50% of their existing capacity, they aren’t opening up their factories as a foundry to external customers, revenues and margins are slipping, yet they want to invest $13 billion in new factories during 2013?

That is quite a risky proposition.

My ideal investing approach is to invest in companies that are clicking on all cylinders, not companies that are going through dry spells.

Investing in companies that are going through rough transition periods is a scary proposition to begin with, but it’s even scarier for capital-intensive businesses. 

Completing a successful turnaround becomes much tougher when companies are spending billions of dollars on new capital in the face of decreasing revenues and sliding margins  For Intel, it's an extremely risky strategy to "double down" on new capital while their financial performance continues to decline.

Not to mention, there is always a huge depreciation hit that accompanies such large capital outlays, which weighs on margins. 

While Intel has a strong competitive position and a solid balance sheet, what if the turnaround doesn’t materialize?

I recommend staying away from this tech-heavyweight for now – it’s just too risky. 


Robert E. Irr III is a Financial Analyst who previously worked at a major technology company in the semiconductor industry. He now writes a tech investing blog at http://www.techinsidr.com. He has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Qualcomm. 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!

blog comments powered by Disqus