Intel Corp. (NASDAQ:INTC) reported first-quarter earnings last week -- and while profits came in higher than expected, the real reason the stock rose was the news of more job cuts.
In this segment from the Market Foolery podcast, Chris Hill, Simon Erickson, and Matt Argersinger explain why Intel, along with the rest of the PC component industry, has seen a rough few years. Also, they examine where the company is looking to grow in the future, and whether it's too early to say whether its plans are solid, and if the enthusiasm for it is justified.
A transcript follows the video.
This podcast was recorded on April 20, 2016.
Chris Hill: Let's start with Intel. First quarter profits came in higher than expected, Simon. That doesn't appear to be the headline, though, because they lowered guidance, and they are cutting about 11% of their workforce. That is not insignificant.
Simon Erickson: 12,000 jobs, right? This should surprise absolutely no one, because PC shipments have just been declining year-over-year for the last five years. Hit the peak in 2011, we've seen year-over-year PC shipments decrease since then, about 300 million shipments last year. But just like Intel is right in the middle of it, PC chips are less in demand right now by the global market. So, what do you do? You go out and try to buy growth. We saw Intel acquire Altera last year, $16.7 billion acquisition. Broadcom (NASDAQ:BRCM) did the same thing with Avago, $37 billion acquisition. You want to expand and get more content with existing customers, buy another customer list and get bigger. But it's a challenging environment out there, to say the least.
Hill: We talked about that last year. I remember, because when they bought Altera, we were sitting in this studio essentially saying, "Sure, they've got the money, but what are they going to do with this thing?"
Matt Argersinger: Right. And I have to say -- I think Simon is right -- there's just so much consolidation, the overall pie is shrinking in so many markets. At the same time, I feel like I've read almost every quarter that Intel is cutting several thousand jobs. I'm wondering who's left working there at this point?
Erickson: Yeah, exactly.
Argersinger: I can't imagine what their workforce is today compared to, say, five years ago. It could be half, I don't know for sure.
Erickson: And they're trying to get more and more custom chips. This is not about just the processors that are in PCs anymore. The Internet of Things, we talked a lot about that. Autonomous cars are going to need some smart-chips in them, too. Altera was making programmable logic chips, which are custom-designed and able to do very specific things. And the future of smart-devices; it's out there, but it's not there today, that's why you see 12,000 jobs being laid off.
Hill: The stock is up a little bit, and time and time again, we see Company X come out, good quarterly results, they lower guidance, and guidance trumps results and the stock drops. We're not seeing that today. I'm assuming it's because of the job cuts. Do you think the optimism in Intel and the management is warranted?
Erickson: I think it's difficult to say today, Chris, because I think demand is going to be the name of this. Right now, efficiency is the name of the game. You're cutting jobs, trying to vertically integrate; you're going out and buying growth like we've seen in semiconductor companies out there. The to-be-determined piece is, is demand going to be what we think it is out there? There's a lot of demand, like we said, from Internet of Things, smart-devices, all these have semiconductor and processing chips in them. We haven't seen that demand yet. I think that's the question we have to answer before we can peg the valuations for Intel that you're seeing right now.
Chris Hill has no position in any stocks mentioned. Simon Erickson has no position in any stocks mentioned. Matthew Argersinger has no position in any stocks mentioned. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.