Although Intel (NASDAQ: INTC ) stock may look cheap compared to the S&P 500, there's good reason for the low price tag. Between a faltering PC market, anemic revenue growth, and profitability concerns, Intel investors have a lot of things to worry about. Together, these factors certainly beg the question: Should you sell your Intel stock today?
PC sales still top dog
As exciting as it is for Intel to develop cutting-edge technology that threatens ARM Holdings' mobile computing stronghold, the company remains deeply entrenched in the PC market. Intel reported its second-quarter earnings results last week, showing that more than 63% of the company's revenue came from its PC client group segment. With worldwide PC shipments as bad as they've been, it's not surprising that investor enthusiasm would be muted toward the company's mobile computing ambitions. Simply put, it's going to take a considerably large tail to wag this dog.
Anemic revenue growth
Without revenue growth, a company's earnings growth potential is dampened because there's only so far cost-cutting can take profitability to new heights. Intel lowered its full-year forecast, now expecting revenue to be flat year over year, which doesn't bode well for profit growth. Analysts expect Intel to post a 12.2% decline in earnings this year and grow by 5.9% in full-year 2014, driven by a 3.9% increase in revenue. For the long-term investor, profitability growth remains a fundamental driver of shareholder returns. Will a 5.9% growth in earnings from a weak comparable be enough to drive Intel stock higher?
Assuming Intel is successful as it gears up to enter the ultra-mobile space with its upcoming Bay Trail processor, it'll likely have a negative impact on the company's average processor selling price. In order for Bay Trail to gain market share against the ARM competition, I'm expecting its average selling price to be somewhere in neighborhood of Qualcomm's, which is about $22 -- roughly one-fifth of Intel's estimated average selling price of $107. Additionally, the mobile computing revolution continues to put negative pressure on the price of PCs, further compounding Intel's average selling price pressures.
The hope is that any future decline in processor average selling price can be offset with an increase in unit volume, but that's not guaranteed, nor does it mean total dollar profits will remain stable. Even if Bay Trail can maintain profit margins in line with the rest of Intel's processors, a $22 or even $30 processor simply doesn't have as much available profit as a $107 chip.
Ultimately, Intel's profitability prospects will be driven by a number of variables, including how the overall PC market fares, if average selling prices decline due to consumers shifting to products like Bay Trail, and if Intel can make up any shortfalls with sufficient unit growth. It's not exactly clear-cut.
No catalyst in sight
We may get a better sense of Intel's future prospects during its investor meeting in November, but it likely won't be until its 2014 earnings results that investors begin to get the scoop how these headwinds are actually influencing results. At that time, Intel's Haswell and Bay Trail processors will have made their run, investors will know if the PC market has begun to stabilize, and we'll know if ultra-mobile products are hurting Intel's total profitability thanks to declining prices.
If you're an Intel shareholder, the question you should ask yourself is if it's worth waiting around for the clouds of uncertainty to potentially clear up. Being a longtime Intel stock owner myself, I'm seriously considering taking my own advice and selling my shares in the coming weeks. There are plenty of compelling opportunities where the path to long-term shareholder success is much clearer.
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