Intel (INTC +4.89%) is one of the most popular technology stocks, and for good reason. It's a huge megacap and a leader in its industry, it has stable earnings and cash flow, and offers an attractive dividend yield. The stock has had a great run in the past couple of years, meaning investors are sitting on some impressive paper gains.
Shares of Intel are up 57% in the past two years, which has trounced the S&P 500 by more than 20 percentage points in the same time frame.
But while Intel is a solid company, whether the stock is a buy right now is a much more difficult question to answer. For all its qualities, Intel has some significant uncertainties going forward. I've been circling the stock because I think it's a great business, but I'm not compelled to buy the stock just yet.
There are two reasons for this. First, PC shipments aren't growing. Growth in computing going forward is clearly in mobile, and that leads me to the second ding against Intel, which is that its mobile business is a massive cash drain. Until investors see progress in these two key areas, I'd wait to buy the stock.
PC shipments are still falling
Investors who are considering buying Intel stock should assess the state of the personal computer industry. Unfortunately, the PC market is not in great shape. Technology research firm IDC recently stated that global PC shipments fell 2.4% in the fourth quarter, due to weakness at the enterprise level. For the full year, PC shipments declined 2.1%.
This paints a worrisome picture for Intel, which is the world's largest chip maker. Intel brought in $55.8 billion in total revenue in 2014, of which $34.6 billion came from its PC business. That means Intel still derives 62% of its revenue from personal computers. This much exposure to a declining industry is making it very hard for Intel to grow, even though Intel's faster-growing segments are doing very well.
For example, in Intel's two strongest growth areas, data centers and the Internet of Things, revenue grew 18% and 19%, respectively, last year. But collectively, these two businesses contribute just $16.5 billion in revenue, less than half the size of the PC business. This is why Intel's total revenue rose a much more modest 5% last year.
As far as Intel's earnings, the huge operating loss posted by the mobile business last year continues to be a big problem.
Intel's mobile business is a huge weight
Even though Intel has anticipated for some time that it needs to get into mobile, it hasn't made much progress. At the beginning of 2014, Intel management laid out the goal of getting its chips into 40 million tablets by the end of the year. Intel actually succeeded, and shipped 46 million tablets last year. This sounds like a success, except for the fact that Intel's mobile ambitions came with a caveat.
Intel had to make considerable pricing concessions to get its chips into all those tablets. This created "contra-revenue" that deducted from sales growth. At such huge volume, Intel's mobile losses skyrocketed. Intel lost a whopping $4.2 billion in mobile last year, up from a $3.1 billion loss in 2013. Contra-revenue actually caused Intel to report negative revenue in mobile in the fourth quarter. For the full year, mobile revenue collapsed 85% to just $202 million.
This casts a pall on whether Intel's mobile business is even viable. The company cannot continue to operate the mobile business at such huge losses. Intel hasn't had much of a response to this, other than to say it's consolidating its mobile and PC segments going forward. But this seems like a weak attempt to simply mask the cash drain going on in mobile, rather than a real solution.
Without progress, the stock isn't cheap enough
At first glance, Intel's valuation looks modest. The stock trades for about 14 times trailing earnings. But Intel's valuation has expanded significantly in the past two years, due to the significant rally.
INTC P/E Ratio (TTM) data by YCharts
As you can see, Intel is actually significantly more expensive right now than it has been in several years. Two years ago, Intel's P/E was 10. Intel's rising price is very highly correlated with multiple expansion in that time. But investors bidding up the stock may be disappointed if Intel's future growth doesn't pick up. Without a concrete plan to turn profitable in mobile, and because of its continued dependence on the PC, a shrinking industry, Intel is going to have a hard time growing enough to satisfy investors. This could cause its P/E multiple to compress and lead to disappointing future returns.
