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For Intel, Only Execution Will Set Shareholders Free

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As an Intel (NASDAQ: INTC  ) shareholder for nearly three years, it has been incredibly frustrating to see the stock stagnate while the NASDAQ 100 and many other technology/chip companies march on to new 52-week highs, and in some cases, all-time highs. While the shares are up just south of 18% year to date, it's tough to ignore the fact that if you'd bought Qualcomm (NASDAQ: QCOM  ) , TSMC, or ARM Holdings (NASDAQ: ARMH  ) in early 2011, you'd be enjoying much richer returns.

The problems are real
The problems that have plagued Intel have been mostly secular -- rapidly declining PC market. But it's tough to ignore the fact that the company still has no credible offerings in the rapidly growing smartphone space and is only just now rolling out competitive products in tablets.

Of course, for Intel, nothing seems to go right in mobile as the company's tablet platform, called Bay Trail, was designed for high-end tablets but will be used for all price points, since the company did not have a platform ready to compete in those markets. The bill of materials -- the auxiliary chips that come with the system-on-chip -- as well as the lack of integration have made it so that Intel is subsidizing the use of these expensive platforms in lower-cost tablets with rebates. This effectively means that Intel isn't seeing a dime of net revenue from the chips in those products next year.

It gets worse. The company's smartphone road map is currently in shambles. Merrifield, Intel's next-generation performance smartphone chip is likely to be too little, too late. A dual-core processor is unlikely to be competitive in a world where quad-core is standard marketing fare, and its quad-core successor, Moorefield, launches far too late to matter. At the low end of the phone market, where all of the growth is, Intel won't have an integrated LTE part until early 2015. Even then, it's not clear how competitive it will be with chips from its competitors. Qualcomm's offerings today look more compelling than what Intel proposes that it will have at the low end in more than a year.

The threats are now being magnified
On top of the company's failure to execute in mobile, the data center group -- Intel's big bright spot, where it has been executing amazingly -- is now becoming a target of rumors that every major data center operator will ditch Intel's chips and design their own based on ARM's IP. While this is unlikely to be the major trend that many are predicting -- developing server chips that are lower-power, more integrated, and faster than Intel's is probably out of the realm of possibility for Google or Facebook -- the seeds of doubt are now planted.

Intel needs to prove itself the old fashioned way
Until Intel starts dazzling investors with blowout numbers that shoot well past the company's current 2014 guidance of "flat" from 2013, the stock is at the mercy of these rumor-driven headlines. After all, the popular image of Intel is that it "missed the mobile boat" and is set to lose share to ARM licensees in servers. This image will be impossible to shake off until Intel proves itself with cold, hard numbers.

While 2014 is still up in the air, 2015 is the endgame
There's no getting around it -- 2014 probably won't be a year of growth unless Intel management was really sandbagging. Under former CEO Paul Otellini, Intel never showed signs of intentionally sandbagging, but during the 2009/2010 recovery, management was frequently surprised at the unexpectedly high demand -- and rich mix -- of its PC and server chip sales, leading to earnings beat after earnings beat.

Intel has signaled that its leadership mobile products begin to hit in late 2014 and through 2015. If Intel is correct and these products are truly the "game changers" that they promise to be, then even in a declining PC market, booming mobile and server sales should be more than enough to begin to drive growth and margin leverage. That's a big "if," particularly for long-term investors whom have heard similar promises in the past.

Foolish bottom line
Intel is a great company. But due to weak PC sales and a lack of a meaningful, profitable presence in mobile-device-oriented semiconductors, the company has seen three years of flat to negative revenue growth. Increased research and development to support new products has put significant pressure on the bottom line. Until Intel shows signs that it'll return to profitable growth, the stock is likely range-bound and, more importantly, vulnerable to any and all negative rumors. 

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  • Report this Comment On December 16, 2013, at 9:57 PM, symbolset wrote:

    On the consumer electronics side Intel needs to do three things:

    1. Kick the Windows habit. Stop holding back chips while Microsoft takes their sweet time getting Windows ready to go with it. This is killing them. None of the main players in mobile want to hold back their designs until long after they're obsolete just to give Microsoft a leg up on competing. They can have their own chips fabbed now, and giving Intel their business means giving Microsoft a chance again by improving the economy of scale for Intel chips - which is bad enough already. Nobody wants to play with Microsoft in mobile any more in any way, shape or form. That didn't work out well in PC land.

    2. Quit with the cannibalization BS already. ARM tablets are killing you with 2560 x 1600 rez on a 10" display. You can knock off requiring max 1366x768 displays on the new Atom devices if you want OEMs to be able to sell their products. Seriously these new mini-laptops and tablets look like a kindergarten toy next to an iPad or Nexus 10 already and those displays are moving down-market.

    3. Enough with the "wait 'till next year" nonsense. Stop talking about future products that may someday be better than currently shipping products and then not delivering them, or having them be unsatisfactory. Seven years of this and we're sick of it. Shut up and deliver. Give us an upside surprise for once. Don't try to ruin our Christmas by telling use in Q1 is going to be this amazing thing that's way better than what's under our tree because you missed Christmas - and then have it be a sad disappointment at CES as well.

    ARM in the datacenter is overstated. Sure, Google, Facebook, Amazon, Twitter and a handful of others can go there for some uses - but they have the serious technology chops to get that done and make it a business competitive strategy and the volume that makes it cost effective. That means they aren't going to share it and cut into Intel's server processor market share by selling that solution to others. Even if they do go own-brand ARM chips they probably won't even buy fewer Intel chips as well because this is not appropriate for many applications.

    Long story short, Intel has the tech it takes to win big in mobile starting in 2014. But do they have the will? Recent press statements about future products suggest "no, they're going to keep doing what they've been doing." That is disappointing.

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