Dear Intel: It's Not You, It's the Market

By Steven Heller - July 19, 2012 | Tickers: AMD, ARMH, INTC, QCOM, TSM | 0 Comments

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Dear Intel (NASDAQ: INTC),

Wall Street is a strange place.  Sometimes they love you and other times they fail to acknowledge your existence.  It’s like the moodiness of high school all over again, except this time there are billions of dollars at stake.  We’ve come such a long way since that youthful period in our lives.        

I wanted to take the time to congratulate the excellent quarter you just reported.  Nice work taking home $2.8 billion on revenues of $13.5 billion.  It’s impressive you managed to grow across all product divisions in an environment widely regarded as challenging.  Sadly, Wall Street isn’t feeling you and your accomplishments probably because you lowered your expectations.  Having done so confirms the analysts’ thinking that recently went on a downgrading spree in your sector.  It’s also why the market thinks your shares are only worth 11 times earnings, significantly lower than industry peers.  The irony here is that Intel’s earns a whole lot more than its peers, but you already know that.  It seems another case of those pesky expectations has gotten the best of your share price.    

Expectations are a funny thing.  If you exceed them, your shares are rewarded handsomely.  If you don’t, you’ve essentially failed, and your shares will trade at a discount to peers.  Depending on the mood of the market, otherwise known as sentiment, it’s a real crapshoot of how shares will trade in the short-term.  If a company expects a bit more softness in the quarter, good luck selling the long-term success story to investors.  That’s what’s funny about it.  Expectations only matter in the short-term for impatient investors.  In the longer term, strong fundamentals will reward those who remain committed. 

I am confident the day will come when the tide begins to rise back in favor of the semiconductor industry.  I believe this day is not too far off for Intel’s shareholders.  I find comfort in knowing shares are trading at historically low valuations, levels not often seen in the last ten years.  In the past, these levels have resulted in subsequent share appreciation. 

I also find comfort in the fact that Intel remains a full generation ahead of the competition in terms of technology.  Advanced Micro Devices (NYSE: AMD) doesn’t stand a chance – you’ve eaten their lunch for breakfast as you spend more in R&D than they can earn in a year.  This crucial reinvestment into your future is what got you here in the first place.  It’s why Taiwan Semiconductors (NYSE: TSM) is now only ramping up 28 nanometer processes while you ramp up 22.  It’s how Intel gains traction against arch rival ARM Holdings (NASDAQ: ARMH) in the fight for the final frontier – mobile computing.  The stars are aligning for Intel to fire on all pistons and compete on levels once thought impossible.  When this happens, no competitor is safe.  Qualcomm (NASDAQ: QCOM) and Nvidia think they stand a chance in the Ultrabook space, but they are busy dealing with the pains of Taiwan Semiconductor’s manufacturing constraints.  Their “fabless” business model is not nearly as rock solid when compared to being vertically integrated like Intel.  In fact, you’re one of the last of The Mohicans when it comes to in-house chip manufacturing – another way you differentiate yourself from the crowd.        

Have I mentioned Microsoft is about to release the next version of Windows?  The odds are in your favor this update will provide a boost to chip demand for users who await its arrival.  

When you add everything up and factor in the favorable valuation, chances are high that patient shareholders are in the right place.  In the end, don’t let the market fool you.  Keep buying back your shares while they remain cheap – I don’t think that will last much longer.

Sincerely,

Steve Heller  

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