Intel’s Past Is Its Own Worst Enemy
01/12/2011 3:00 pm EST
Intel (Nasdaq: INTC) will probably report a very good fourth quarter of 2010 on Thursday, January 13, after the market closes. The Wall Street consensus is looking for 50 cents a share. That would be up 22% from the fourth quarter of 2009.
I think Intel is likely to make that number. That would be a very good result for a stock that’s trading at just 11.1 times trailing 12-month earnings.
And I don’t think it’s going to matter much at all. Investors have pretty much decided that Intel is a has-been chip stock.
Think about why this stock trades for just $21 and change.
Intel’s earnings are projected to grow by 93% in 2010, but hanging over that projection—and the reason that it’s not reflected in the share price—is a conviction among analysts and investors that the computing market has left Intel behind. Intel may remain the king of the hill—all right, the emperor of the hill—in the market for desktop and laptop PCs and for servers. But in the new world of computing via tablets (Apple’s iPad and competitors) and via smart phones, Intel is just another chipmaker. And one without the market share of an ARM Holdings (OTC: ARMHF) or the style points of the A4 chip, designed by Apple and manufactured by Samsung, that powers the iPad.
With the market moving away from Intel’s core strength, the company will soon be dead in the water, according to Wall Street. Projections for 2011 show earnings declining by 2.2% for the year. And that’s why a stock with 93% projected earnings growth in 2010 sells for just $21 a share.
The truth, in my opinion, is a little more complicated. Intel knows where the market has moved. That’s why it came up with the Atom, a chip designed precisely for the new devices. The Atom hasn’t got much traction in the market yet, but anyone who has followed Intel for years knows the company’s strategy is to put out a competitive chip and then every 18 months come up with a faster, more powerful chip to replace it. And thanks to Intel’s amazingly deep experience with chip manufacturing—and its deep pockets—this steady march of chip generations will eventually wipe out all but the most deep-pocketed of competitors.
At least that’s how it has worked in the past.
The real reason not to own Intel now isn’t because the company is indeed done. Or because its longtime partner Microsoft (Nasdaq: MSFT) has just announced that it will work with ARM. Or that its strategy won’t work this time.
It’s because this time the strategy is going to be really, really expensive. It’s one thing to outspend and out-manufacture an Advanced Micro Devices (NYSE: AMD), Intel’s longtime punching bag in the PC market. It’s quite another to outspend and out-manufacture Samsung and an entire new generation of competitors such as Qualcomm (Nasdaq: QCOM).
Can Intel win this round? Certainly. Can it do it while delivering the 66% gross margin that the company achieved in 2010? No way.
So what investors are looking at is a prolonged battle for the fastest-growing part of the market, which will see sales growth slow at Intel from 24% to 8% in 2011, according to Standard & Poor’s, and that will see gross margins come down to 62% in 2011 and operating margins fall to 31% in 2011 from 37% in 2010.
Of course, most companies would give just about anything for margins like those, but for a while, Intel won’t be rewarded for beating all those companies, but instead punished for not outperforming its own history.
I’d say that at these prices, Intel is now a great value buy—except that I can’t give you any idea of how long it might be before the stock market decides to see the value in the stock.
When sentiment is this strong against a stock, I think it’s best to step aside. (Unless you can find someone to give you one of those deals that Warren Buffett manages to strike where you get to buy a value stock at a huge discount and someone tacks on an 8% yield so you get paid while you wait. But I haven’t seen one of those cross my desk lately.)
As of January 12, 2011, I’m selling Intel out of my Jubak’s Picks portfolio with a gain of 1.8% (plus dividends) since I added it to the portfolio on January 15, 2010. (Intel is set to pay a dividend of 18 cents a share on March 1, 2011 to shareholders of record on February 7, 2011.)
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Intel as of the end of November. For a full list of the stocks in the fund as of the end of November, see the fund’s portfolio here. I’ll have the fund’s portfolio as of the end of December posted in a few days.