What's Wrong With Intel Corporation Today?

Image source: Intel.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is generally doing fine today. The blue-chip index was up nearly 0.7% in early afternoon trading, and 24 of its 30 components show positive returns for the day. But there were six laggards, and among the worst of these was Intel (NASDAQ: INTC  ) .

The microchip giant was trading down down 0.5%. The damage stems from a research note by heavyweight analyst house Morgan Stanley, which doesn't change the firm's underweight rating of Intel shares but paints a dire picture of some noncore operations at the chipmaker.

Intel designs baseband wireless chips for use in mobile devices. As part of last week's first-quarter report, the company disclosed a $3 billion operating loss in wireless products for fiscal 2013. Morgan Stanley analyst Joseph Moore was flabbergasted by the size of this wireless damage, and argues that Intel would be better off without this money-losing distraction.

Moore doesn't even suggest spinning the wireless division out or selling it to a competitor. Instead, he wants Intel to simply stop working on baseband chips, winding the whole thing down entirely. Doing so would unlock a major benefit to Intel's margin structure, he asserted.

"If the company could reduce [operating expenses] by $2 billion, that would be additive to EPS by $0.29 per share, with relatively small revenue/gross margin impact," Moore said in his research note.

That would be a considerable improvement, adding 15% to Intel's full-year bottom line.

Of course, Moore is making a few assumptions that could use some discussion.

For one, it isn't obvious that Intel would save $2 billion a year by shuttering the wireless business. Much of the heavy investment directed into a brand new product line goes into the initial research, and there's no way to retroactively reduce the wireless R&D expenses in 2012 and 2013. Intel might get some value out of this bootstrapping investment by selling the wireless operation, or spinning it off as a stand-alone company, but just hitting the brakes at this point doesn't make sense.

Also, the wireless products are only getting started. Intel reported $156 million in sales for that division in the first quarter, making it the smallest of the company's newly defined segments. Shouldn't the new product line get some time to establish itself in the market? Shutting it down with barely one quarter in the books seems like a knee-jerk act of panic.

So I wouldn't put too much stock in this Morgan Stanley analysis. It seems based on extreme short-term thinking, with little regard for Intel's long-term health. I'm certainly not selling my personal stash of Intel shares based on this report.

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  • Report this Comment On April 22, 2014, at 2:19 PM, will1946 wrote:

    The big new york investment banks, at least this one and Goldman, are really rabidly against Intel. I don't know why, but it is certainly true that goldman has a sell on Intel with the absurd price of $17-21. Now that is really "analysis", isn't it?

  • Report this Comment On April 22, 2014, at 2:46 PM, will1946 wrote:

    There's nothing wrong with Intel, but rather with the extremely biased "analysts" at morgan stanley and goldman who would never admit they are wrong and instead of just keeping quiet keep grasping at straws.

  • Report this Comment On April 22, 2014, at 3:49 PM, systemBuilder wrote:

    The microprocessor itself has become a commodity, easily licensed from ARM, and a good wireless baseband has become the key to sales for microprocessor makers. Intel is in a battle for survival and their low ROI on wireless peripherals (5% ROI this quarter, according to this article) is not looking very promising for Intel.

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Anders Bylund

Anders Bylund is a Foolish Technology and Entertainment Specialist. Where the two markets intersect, you'll find his wheelhouse. He has been an official Fool since 2006 but a jester all his life.

Hypoallergenic. Contains six flavors not found in nature. Believes in coyotes and time as an abstract.

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