Why It’s Time to Conduct a Reality Check on Intel

Chip manufacturer Intel's (NASDAQ: INTC  ) recent performance during the fourth quarter seemed like a complete reversal of the high expectations set by the company at the recent Consumer Electronics Show at Las Vegas. While the company's revenue rose 2.6% on a year-over-year basis to $13.8 billion, net income went up by 6.4% to $0.51 per share, narrowly missing Street estimates of $0.52 per share.

However, what really pulled down Intel's share price by a substantial 4.7% was its relatively flat revenue guidance for the whole of 2014 even as analysts were expecting some projections of growth. That is certainly not a good sign for a company that continues to derive a majority of its revenue from sales of chips for the fast-fading PC industry.

And with research firm IDC predicting worldwide PC shipments to fall by a further 3.8% in 2014, it's probably time to find out whether Intel is truly nearing the end of the road.

The thickening storm clouds
The bad news doesn't end there for Intel, as the company's server chip division, the only previous bright spot, reported a meager 1% rise in unit sales. Intel has even gone ahead and lowered its revenue projection for that division to 10% from an earlier high of around 15% for this year, acknowledging that it might have 'overestimated' the initial demand. In any case, while server chips do yield more profits than those for PCs, they are no match in terms of volume sales.

And the wheels are not moving
The slowdown in chip sales has also resulted in under-utilization of manufacturing capacity, something that may have forced Intel to indefinitely postpone the opening of a brand new chip manufacturing facility or 'foundry' in Arizona. Of course, part of this is also due to the management's revised strategy to trim capital utilization expenses in the wake of the decline in demand.

Although Intel is trying its best to counter this problem with its plans to open its foundries to other chip manufacturers and potential competitors, it has not roped in any major customer after Altera. That may be because the company is finding it hard to woo customers from Taiwan Semiconductor  (NYSE: TSM  ) , or TSMC, the planet's biggest contract chip manufacturer.

Having around 50% of global market share, TSMC has also planned massive investments worth a whopping $27 billion into newer technologies and capacity expansion. And the company is confident enough to expect both revenue and profits to go up by a minimum of 10% in 2014. On the other hand, Intel is traditionally perceived as a PC chip manufacturer, something that lessens its chances of success even more in the market.

The dismal mobile devices scenario
Intel's disappointing performance in the smartphone chip manufacturing arena remains pretty much the same, as evidenced by its embarrassing less-than-1% share of the global mobile processor market. The company's 'other architecture operating segments' division or the one that makes chips for smartphones and tablets, posted an operating loss of $620 million in the fourth quarter compared to $495 million during the same period last year. This makes it clear that Intel's core operations in this segment are not running the way they should be.

The competition, however, is having a field day. Rival Qualcomm (NASDAQ: QCOM  ) dominates more than 90% of the mobile chip market, apart from being a clear leader in the area of manufacturing LTE-enabled chips for over two years now, enabling it to remain generations ahead of companies such as Intel. With over 97% share of global LTE-based revenue, Qualcomm is now aggressively focusing on the low-end LTE-enabled chip segment, in a bid to gain more share in emerging markets such as China. While Intel is trying to enhance its presence in the low-end chip segment with products such as SoFIA, the gap with Qualcomm just seems way too much.

Some Foolish final thoughts
With PC shipments expected to continue to decline, following a temporary boost due to Microsoft's planned phase-out of the Windows XP OS, Intel's bread-and-butter business is as good as gone. On the other hand, its strategy of producing low-end smartphone chips is likely to put pressure on gross margins, as such chips are much less profitable than those for PCs and servers. And declining gross margins should be a distinct point of concern for believers in this company.

At the same time, with consumers yet to warm up to the idea of wearable devices even in developed markets, manufacturing chips for such products is unlikely to become the life saver that Intel hopes it'll be, at least in the near term. As things stand, this stock is unlikely to get a boost anytime soon, and it's probably best to let go of a large part of it from your portfolio.

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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 January 22, 2014, at 6:34 PM, techy46 wrote:

    Fools - However, what really pulled down Intel's share price by a substantial 4.7% was its relatively flat revenue guidance for the whole of 2014 even as analysts were expecting some projections of growth.

    Baloney, Intel said at it's November, 2013 Investor Conference that earnings and revenue would be flat for 2014. Why don't the analysts listen to Intel and shut up. Oh, I forgot they're getting paid to make stuff up,

  • Report this Comment On January 23, 2014, at 1:29 PM, roguesisland wrote:

    "...the gap with Qualcomm just seems way too much."

    What is that supposed to imply?

    That Intel can't compete with Qualcomm? Or, that they will not have any growth [taking market share from competitors] in mobile devices?

    Are the people who consider themselves [tech] journalists on the internet really this bad?

    tick, tock...

  • Report this Comment On January 23, 2014, at 1:39 PM, SnarfJabroni wrote:

    Three years ago, Intel had never in its long and successful decades of history, ever had as much as $40B in annual revenue.

    Intel now regularly makes well over $50B in annual revenue, even though it has been flat over the past few years.

    If I had a nickel for every proclamation like this guy's, of the death of the PC and/or Intel, I'd be one.....rich......Fool!

  • Report this Comment On January 24, 2014, at 10:40 AM, SSchlesinger wrote:

    I can't wait to see what he'll say three years from now when Intel has cut off TSMC's ability to finance new nodes by flooding the market with higher performance SoCs.. Who's going to pay the premium for TSMC's new nodes? Nvidia? Qualcom? TSMC is having a problem moving 28nm against it's ARM FAB competitors. Intel flooding the market with 22nm and soon 14nm isn't going to help.

    I'm of the opinion that TSMC is facing some much larger issues at 28nm than they are comfortable letting onto. The real acid test was Apple passing on them. Do you honestly think Apple wants to hand over tens of billions to Samsung? The deal was set years ago for the switch and then something happened. I know BOM for the iPhone is important to Apple, but the could afford to lose a few dollars if TSMC really had the solution and it was a price issue.

    TSMC is struggling at 28nm. Their solution? Change public opinion. They have 20nm planar coming out in high yields and everybody is excited.! Nobody is buying it, there are no major design wins with it, and even their PR machines can't hide that fact. Taking the heat off of their 28nm woes by focusing on 20nm is a dumb plan.

    Yes there are storm clouds on the horizon, and soon it will be raining 14nm Intel SoC's.

  • Report this Comment On January 27, 2014, at 10:39 AM, fearandgreed2005 wrote:

    SSchlesinger,

    I think you are right. On the recent ALTR earnings call their CEO stated that the TSMC 20nm planar process was unusable because of high power dissipation. If it's unusable for ALTR, whom is it usable for?

    I think TSMC is facing some headwinds and the 14nm FinFET is going to put some real pressure on them and their customers.

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