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Owning shares of Intel (INTC +5.87%) 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.
