Should Intel Bulls Retreat?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I am an unabashed Intel (NASDAQ: INTC) bull and have been long the stock since my career began. Now that we’ve gotten that out of the way, on to the issue at hand: on September 7th the company cut its outlook for the third-quarter by a billion dollars. This indicates a 2% decline in sales for the quarter prompting the question: is it time for Intel bulls to retreat?
I’d argue not, but it is time to brace for the bumpy road ahead. Despite the company’s dominance of the PC market, the mobile market still continues to elude them and remains a major weakness. This weakness is becoming increasingly critical because, as ads strewn across the internet will tell you, the PC era is coming to an end.
Recent dismal results from Hewlett-Packard and Dell seem to confirm a downtrend - bad news for Intel. Keep in mind 85 percent of the company’s net revenue comes from the PC market; without a serious shift to mobile the end of the PC era would certainly end Intel.
If that’s the case, why don’t I think it’s time to take my money and run? Three very good reasons; the PC isn’t dead yet, Intel already has major mobile moves in place, and rapid evolution of its PC line.
The PC Isn’t Dead Yet
While it is clear mobile is changing the way we do our computing and is cannibalizing some of the PC market, Intel isn’t the only chip designer to cut forecasts. Mobile chip designer ARM Holdings (NASDAQ: ARMH) has shown signs of worry despite dominating the mobile market and having little to no presence in the PC market.
ARM’s CEO, Warren East, indicated the company was slowing hiring in anticipation of a weaker second half of the year. He also said ARM’s customers were not expecting the typical uptick in sales for the last half of the year which may point to a general slowdown in computing, not just PCs. Qualcomm’s (NASDAQ: QCOM) near-term outlook seems to confirm this, with the mobile chip maker cutting its semiconductor volumes for the current quarter.
A portion of the slowdown can also be attributed to the wait for Microsoft’s (NASDAQ: MSFT) latest Windows update. Though reviews for the update have been mixed, there is certainly a contingent of consumers waiting for Windows 8 machines to hit the market. It is worth noting Windows 8 likely has no effect on the enterprise market; Windows XP is still on 42.52% of desktops and businesses are notoriously slow to upgrade.
Intel’s Mobile Presence is Growing
Even if the PC is alive and well there is no denying Intel needs to gain a foothold in mobile. It has already seen limited success with lower-end smartphones in developing nations but Intel’s big tests will hit the market later this year. The first, an Android smartphone, will be revealed on September 18th and will be followed by Windows 8 tablets later this year. A strong showing in both categories could go a long way toward establishing a solid mobile position. It also doesn‘t hurt that the phone was developed by Motorola, now a part of Google (NASDAQ: GOOG), making it an ideal showcase for Intel with the potential to spark other Android-based designs.
Windows 8 is more of a mixed bag, bringing more mobile opportunities for Intel while also opening the door for ARM-based Windows machines. Even though Windows RT does bring the threat of ARM devices, the initial RT devices will have a serious hurdle compared to their Intel-based counterparts. The Intel devices will have access to the full Windows library, while ARM devices will depend on a smaller one. The lack of software should help Intel fend off ARM and control the Windows tablet market.
The Blurring of PC and Mobile
The major sticking point for Intel’s mobile approach has been ARM’s greatest strength; power consumption. ARM designs chips focused on energy efficiency from the ground up where Intel has long had a performance based approach. Intel’s mobile line, Atom, performs in the middle of the pack and will improve but the real story is it PC line.
Intel is expected to unveil the fourth generation of its flagship Core line, Haswell, next week and early reports indicate the company has reduced power consumption by 41%. The reduction in power consumption isn’t enough to land Haswell inside the next generation of Apple’s iPad but it is enough to begin blurring the line between mobile and PC. As the chips that drive laptops and ultrabooks become increasingly power efficient one of the major advantages of tablets will begin to fade. Smaller and lighter PC’s should push the market back toward Intel’s strength - performance - and help it maintain control.
In the short-term, expect a bumpy road for Intel, but as a long-term investor I expect Intel to gain a foothold in the mobile market. Intel’s mobile presence is in the beginning stages, but the company is poised for mobile growth and I'm not the only one who has noticed. Deutsche Bank even recently downgraded ARM based in part on Intel’s move into mobile which speaks volumes. When you factor in Intel's healthy 3.72% dividend yield and steady dividend growth rate, Intel is still worth staying long.
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