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Is Intel Beginning to Test Your Patience?

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Chip manufacturer Intel (NASDAQ: INTC  ) seems to be developing an uncanny ability to make investors jittery about its future prospects. The company's recently released third quarter earnings figures sent out mixed signals as net income at $0.58 per share managed to beat analyst expectations, but revenue at $13.48 billion stayed more or less flat on a year-over-year basis. However, what really pulled down Intel's stock price was its revenue guidance of $13.7 billion for the current quarter that fell short of Street estimates .

Intel's problem is that it still derives more than 80% of its overall revenue from making chips for personal computers . However, a recent report from research firm IDC reveals a 7.6% fall in worldwide PC shipments, the sixth straight quarterly decline for what is largely considered to be a sunset industry . As a natural outcome, Intel's third quarter PC chip division sales also fell 3.5% from the year-ago period .

So, is Intel still worthy of remaining a part of your tech portfolio? As we delve a little deeper into the whole scenario, it seems most of the positives for Intel have conditions attached to them.

The state of the PC industry
For starters, things may not be as bad as perceived for the PC industry. For instance, the latest IDC quarterly data reveals global PC shipments fell 7.6% instead of its earlier prediction of a 9.5% decline. This may have been driven by companies upgrading their PC operating systems as support for Windows XP is officially terminated next year. But, IDC has also warned about a high probability of global PC shipments undergoing another round of decline in 2014, indicating the bad times are set to continue even further .

Server chip division sales
The only saving grace for Intel in an otherwise lukewarm earnings report has been a 12% increase in sales for its server chip division, fueled by increased demand from companies like Facebook and Amazon that depend on huge data centers for their operations . However, while server chips certainly tend to be more profitable than PC chips, they do not match up to the latter category in terms of volume sales.

A new generation of processors
Any talk of Intel these days is incomplete without a mention of its new line of PC-based processors code-named Haswell that promise optimal performance while consuming minimal battery life. In fact, Intel's Haswell chips are set to power Google Chromebook models to be launched during the upcoming holiday season that are also said to be less costly than conventional ones .

The only catch – PC shipments have continued to remain weak in the traditionally strong third quarter when back-to-school buying tends to boost sales, according to Gartner . To add to it, Haswell's successor Broadwell has already been subjected to an unscheduled three-month production delay due to technical glitches in Intel's much-touted 14-nanometer production line .

Intel hopes to counter these setbacks through its newly developed Bay Trail line of mobile device processors that should surface in tablets to be marketed during the holiday season. Unfortunately, Apple's upcoming iPads may spoil that party.

The competitive scenario: Taiwan Semiconductor and Qualcomm
Intel's competitors, on the other hand, seem to be doing well. Fellow chip manufacturer TSMC or Taiwan Semiconductor Manufacturing Company Limited's (NYSE: TSM  ) massive investments in its newest 20-nanometer production line seem to be well justified already . Currently the planet's largest contract chip manufacturer, TSMC recently posted record third-quarter net profits that exceeded analyst expectations on the back of increased demand for smartphone-based chips .

One of TSMC's biggest clients is Qualcomm (NASDAQ: QCOM  ) , the undisputed leader in the production of chips for mobile devices, an area where Intel is still trying to gain a foothold. According to a recent report from Strategy Analytics, Qualcomm continues to dominate the global smartphone chip market with a 53% share of the total revenue and boasts of a wide range of customers including Samsung, Sony, HTC, and LG Electronics . Qualcomm's primary strength lies in the manufacture of LTE baseband chips, an area where it enjoys near total domination with around 97% share of global LTE based revenue .

Some Foolish parting thoughts
Two important things about Intel have emerged from the latest reported results. One, the company's forecast for gross margins seems to be in sync with analyst estimates , which is significant because low-end chips meant for low-cost devices such as tablets may create margin pressure.

Second, management continues to be much more realistic than before, slashing capital expenditure targets to adapt to slowing demand. At the same time, that should lead to increased dividend payout, something which has not happened as yet.

On the whole, the biggest disappointment about Intel seems to be its continued inability to discover a secure alternate stream of revenue generation, which makes it overtly reliant on the fast-fading PC industry. I would recommend keeping a very close watch on this company's developments over the next couple of quarters and if things do not seem to be working out in the right direction, it may be time to make a drastic decision on Intel.

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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 19, 2013, at 9:44 PM, Netteligent09 wrote:

    As always, Intel does had all the success formula and strategy in place with many advantages.

    Intel had all the winning cards in their hands to make them successful to begin with.

    Intel does not need huge management with many divisions to support the current products.

    Still Intel never take it seriously and do felt threaten until now. Life is good.

    It is a matter of execution, cultures, and right management to drive them. Most of Intel's management come out from core business units and do not want to take risks.

    They don't understand much about new business solution sells.

    Most of the key initiatives end up in a spectacular failures.

  • Report this Comment On October 19, 2013, at 9:58 PM, Netteligent09 wrote:

    One more thing, worldwide traditional computer market is mature and continue to decline with less profit margin for many years ahead.

    AMD and ARM will steal more market share from Intel for years ahead Watch and see.

    AMD moving ahead with new high end product lines for games and ARM based platforms.

    AMD and their platform to optimize for all the worldwide standard HDMI, USB, nice performance video, etc. Intel is pushing for proprietary interconnects with terrible video.

    AMD & ARM optimizes for tight system integration to improve performance and reduce manufacturing cost. Intel pushing for multiple components to sell more.

    AMD focus on fewer models, Intel pushing for many different models to match with cost

    AMD seems to understand by keeping the price low enough to attract customers with their new good processors. Intel offers very old CPU for same price. The new processor platform cost twice or more.

    Intel selling commodity products now. The old strategy does not work.

    Clean up deadweights starting from the top. Time to get rid of marketing and cronies.

  • Report this Comment On October 19, 2013, at 10:07 PM, stretcho44 wrote:

    "Intel's problem is that it still derives more than 80% of its overall revenue from making chips for personal computers ."

    Subhadeep - You tossed out this 80% number but failed to document how your arrived at it. The DATA CENTER GROUP accounted for 21.5% of the Q3/2013 Revenues. That only leaves 78.5% and does not consider embedded, software, .... I think your 80% number is exaggerated and therefore anything else you say is equally suspicious.

    Can you describe how you arrived at the 80% number?

  • Report this Comment On October 19, 2013, at 10:19 PM, Netteligent09 wrote:

    My Mom always told me "great business is where everybody is a winners, include customers."

    Throughout the centuries there were great men who took first steps down new roads armed with nothing but their own vision. Innovation and breakthrough come from the unexpected small guys. Both Android and Apple create and attract all the talents.

    Intel supposes to drive Android and Linux, not ARM and Google.

    Nobody want to do business with Wintel and soon join the rest of the world

    I am really frustrate with Intel, Dell, Microsoft, and HP's management and their executive team. Not really surprise to see these companies slowly fading with sunset. Only good memory behind.

    You can ignore reality, but you cannot ignore the consequences of ignoring reality.

  • Report this Comment On October 19, 2013, at 11:35 PM, stretcho44 wrote:

    Netteligent09 wrote:

    "You can ignore reality, but you cannot ignore the consequences of ignoring reality."

    Chopping up an Ayn Rand quote to try to make a point.

    "Nobody want to do business with Wintel and soon join the rest of the world"

    Companies want to do business so they can make money. They will "join the rest of the world" when it makes economic sense for them. They will NOT "join the rest of the world" when it DOES NOT make economic sense. For you to say otherwise is ludicrous.

    “Throughout the centuries there were men who took first steps down new roads armed with nothing but their own vision. Their goals differed, but they all had this in common: that the step was first, the road new, the vision unborrowed, and the response they received — hatred. The great creators — the thinkers, the artists, the scientists, the inventors — stood alone against the men of their time. Every great new thought was opposed. Every great new invention was denounced. The first motor was considered foolish. The airplane was considered impossible. The power loom was considered vicious. Anesthesia was considered sinful. But the men of unborrowed vision went ahead. They fought, they suffered and they paid. But they won.”

    ― Ayn Rand, The Fountainhead

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