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Why I'm Giving Intel 1 More Year

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Owning shares of Intel (NASDAQ: INTC  ) over the last few years has certainly been a frustrating experience. The market has been hitting all-time highs and Intel has been a serial disappointment. By and large, investors remain unconvinced that the world's greatest semiconductor manufacturer will return to days of greater glory. After all, the company has made essentially zero traction in mobile, and its core business remains at the helm of the struggling PC market. Despite the negativity, I've officially decided to give Intel at least one more year to show signs of improvement before it can be sold from my portfolio.

An uncanny correlation
The correlation between year-over-year changes in Intel's operating income and year-over-year changes in worldwide PC shipments is quite uncanny.

Source: IDC.

To boil it down, I'm waiting to see if the PC market -- yes, the much-hated PC market -- makes a comeback. By the end of next year, compelling and affordable PC designs based on Intel's cutting-edge processors, Haswell and Bay Trail, will have had ample time to gain traction in the marketplace. This holiday season, Intel expects entry-level Bay Trail touchscreen laptops to start at $299, 2-in-1 devices to cost as low as $349, and Haswell laptops to start at $299. In other words, Intel-powered devices will finally be able to compete on a more level playing field against mobile computing devices in terms of affordability, form factor, and battery life.

Sources: Intel and author's calculations.

It's important to note that Intel's incredible operating income growth in the fourth quarter of 2010 and the first quarter of 2011 were driven by the impact of the Great Recession and some very weak prior-year comparables.

The ace in the hole
Come April of next year, Microsoft will be ending support for its 12-year-old Windows XP operating system, essentially pressuring the XP-loving enterprise segment to upgrade its aging fleet of PCs. According to Gartner, PC shipments in the U.S. increased 3.5% in the third quarter, marking the second consecutive quarter of growth, suggesting that the enterprise segment may have begun upgrading their PCs ahead of the end-of-support deadline. Ultimately, this looming deadline could provide a nice tailwind for U.S. PC shipments in the coming quarters.

Cautiously optimistic
According to Intel, there are 500 million PCs that are four years or older in operation today. With Intel's big PC refresh about to saturate the market and give it its best opportunity to compete against lower-cost mobile computing devices, I'm waiting to see if the PC market rebounds over the next year. Judging by the trajectory of PC shipment volumes, it appears that the worst has subsided and I remain cautiously optimistic that next year could show signs of improvement for the PC market.

Should the PC market begin to find some footing next year, I'll be watching if Intel's operating income returns to growth on a year-over-year basis. At the end of the day, Intel had some pretty weak comparables in 2013 for it to succeed against in 2014, so if Intel can't achieve comparable growth, I'll be throwing in the towel for sure.

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

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  • Report this Comment On October 31, 2013, at 8:31 PM, stretcho44 wrote:

    "An uncanny correlation"

    There is one more uncanny correlation that you might want to examine. The Intel short interest at the May 19, 2012 peak was 93,017,070 shares (as of 5/15/2012). The short interest bottomed at 50m shares but bounced around between 50m and 80m shares.

    10 reporting periods later after 5/15/2012 on 10/15/2012 the short interest had increased by 80m shares or 8m share increase per 1/2 month or about 11 trading days. A steady increase in short interest for 6 months. You can see when they lightened up from your YCharts chart.

    The Intel chart after December 2012, shows higher lows and higher highs. A very nice chart in the face of a short interest that continued to grow by another 50m shares.

    Settlement Date Short Interest Avg Daily Share Volume Days To Cover Short Interest Increase

    10/15/2013 255,296,552 30,654,074 8.328307 3,756,755

    9/30/2013 251,539,797 30,254,243 8.314199 5,117,638

    9/13/2013 246,422,159 34,179,334 7.209683 -2,222,505

    8/30/2013 248,644,664 29,632,859 8.390843 3,488,498

    8/15/2013 245,156,166 28,868,140 8.492274 2,132,890

    7/31/2013 243,023,276 55,321,789 4.392903 160,131

    7/15/2013 242,863,145 34,612,481 7.016635 7,085,785

    6/28/2013 235,777,360 45,899,702 5.136795 6,181,055

    6/14/2013 229,596,305 40,417,975 5.680549 5,173,260

    5/31/2013 224,423,045 35,377,507 6.343665 -526,699

    5/15/2013 224,949,744 31,549,848 7.129979 -8,262,469

    4/30/2013 233,212,213 71,694,120 3.252878 -2,254,913

    4/15/2013 235,467,126 41,270,640 5.705439 -3,295,746

    3/28/2013 238,762,872 35,500,532 6.725614 4,866,446

    3/15/2013 233,896,426 39,064,511 5.98744 17,889,509

    2/28/2013 216,006,917 44,946,805 4.805835 7,809,154

    2/15/2013 208,197,763 30,642,118 6.794496 11,239,793

    1/31/2013 196,957,970 86,401,976 2.279554 -8,877,223

    1/15/2013 205,835,193 39,470,361 5.214931 -9,668,517

    12/31/2012 215,503,710 35,920,741 5.999423 -14,099,449

    12/14/2012 229,603,159 43,896,249 5.230587 9,069,647

    11/30/2012 220,533,512 61,518,285 3.584845 21,673,077

    11/15/2012 198,860,435 47,643,611 4.173916 -1,890,512

    10/31/2012 200,750,947 60,425,032 3.322314 18,253,358

    10/15/2012 182,497,589 45,916,938 3.974516 80,981,364









    5/31/2012 101,516,225 8,499,155

    5/15/2013 93,017,070

  • Report this Comment On October 31, 2013, at 8:38 PM, techy46 wrote:

    Come in Fools, you buy Intel cyclically at or below $20 in increasing tranches and sell it at or about $24 making 20-30% on each cycle. I'd modify those price points by $2 or more this time around since we're approaching a Windows 8 and Intel 22-14nm perfect storm in 2014-15. If everything comes together which is Atom+LTE+14nm and Windows 8.2 we'll see Intel around $30 and MS round $40,

  • Report this Comment On November 01, 2013, at 5:43 AM, roguesisland wrote:

    This says it all about the author and the media outlet providing the story...

    "He's a strong advocate of owning the greatest businesses and sticking with them forever."

    But he will dump Intel next year if they don't provide him with his cake so he can eat it.

    There are very few who are true long term shareholders from what I read.

  • Report this Comment On November 01, 2013, at 9:49 AM, TMFTopDown wrote:

    @rougesisland --

    While Intel is certainly one of the most important businesses out there in terms of technological achievements, that alone doesn't necessarily make it one of the best investments to stick with forever.

    I bought Intel well over a year ago, before I was on the quest of buying the greatest businesses and sticking with them forever. The vast majority of my holdings I've acquired since then I don't ever plan on selling.

    Because Intel is a "legacy" holding, I'm giving the company the benefit of the doubt and what I believe to be ample time to work through these headwinds.

    Thanks for your comment!

    Steve Heller (TMFTopDown)

  • Report this Comment On November 01, 2013, at 11:53 AM, pondee619 wrote:

    Is the hope for an improving PC market the only thing Intel has going for it?

    If Intel is a "legacy" holding that you have held for "well over a year ", how long have you been at this?

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