A Much More Pessimistic Take on Intel

by Brad Moon | November 28, 2012 11:57 am

A Much More Pessimistic Take on Intel

Intel (NASDAQ:INTC[1]) has been much in the news lately, and mostly not for the better. CEO Paul Otellini is retiring earlier than expected. Microsoft’s (NASDAQ:MSFT[2]) Windows 8 launch is apparently failing so far to get PCs flying out of stores. And Intel customers like Dell (NASDAQ:DELL[3]) are having another rough year. Intel itself still hasn’t made a big splash in mobile, and its stock price is at 12-month lows (down 30% since May).

So last week, I asked if the time seemed right to see Intel’s $20 stock price as a buying opportunity[4]. My opinion was that Intel is likely to bounce back, making it a good prospect right now. That viewpoint was shared[5] by some other InvestorPlace contributors as well.

Since then, there’s been a lot more analysis of the Intel situation, including an article on the topic by veteran tech writer Bob Cringely[6]. The computer industry columnist, author and info-tech TV host is never short on opinions when it comes to what’s going on in Silicon Valley. Cringely isn’t always right, but he remains plugged in to the tech market, and he’s never afraid to write what he thinks.

And his take on the Intel situation[7] is pretty much the opposite of what mine was.

Cringely believes Otellini was fired by Intel’s board of directors, a viewpoint that runs contrary to the official version that had the CEO surprising the board with his resignation[8]. He describes the event in much stronger language than most coverage: “This is no retirement and it is more than just a firing, too — this is something ugly.”

The focus of Otellini and the board on PC processor rival Advanced Micro Devices (NYSE:AMD[9]) — with the result that Intel completely missed out on the rise of mobile devices — is blamed for Otellini’s departure. But the single event Cringely fingers for his apparent dismissal is Apple’s signal that it may ditch Intel chips in its Macs in favor of its own processors.

On Intel’s mobile prospects, Cringely points out that the two largest manufacturers of mobile devices — Apple and Samsung — make their own processors and will never be Intel customers. That dooms the company to a position of being a minority player in mobile, no matter what it does.

Wrapping up the article, Cringely feels Intel’s board needs to be replaced, too, and he suggests that the company will never regain a leadership position unless it finds a completely new technology area to dominate. Cringely’s expectation, though, is that Intel will continue in a business-as-usual mode  — and will continue its fall.

That’s certainly a much harsher take on things. While I agree with many of his points, I’m still not convinced that Intel is doomed to eventual irrelevance. In fact, I still think it’s a buying opportunity at $20.

Yes, Intel missed the boat on mobile. It’s also unlikely to ever dominate that market segment. However, the company shouldn’t be counted out in terms of becoming a solid competitor to ARM (NASDAQ:ARMH[10]) and Qualcomm (NASDAQ:QCOM[11]) in the mobile market. After a delayed start, Intel is making inroads: Smartphones and tablets are beginning to appear with “Intel Inside” stamped on the back panel.

It’s also worth putting some numbers in perspective. Yes, mobile devices are outselling PCs by a large margin. However, the processor powering what is arguably one of the most powerful smartphones available today — Apple’s iPhone 5 — is estimated to carry a $28 price tag[12].

Intel collects much more than that for the CPUs that PC makers put in their machines. How much more? Published volume pricing on Core i7 processors used in many computers is $294 per unit, while more serious silicon like a Core i7 Extreme goes for $999 in quantity[13].

Obviously, big manufacturers will get significant discounts, but this is why Intel generates so much cash. Even with world PC sales flat, more than 87 million were sold last quarter (compared to 169 million smartphones[14] and 27.8 million tablets[15]). With Intel dominating the CPU market for PCs, it’s selling the lion’s share of those higher-value chips.

PC sales are forecast to stay flat or decline for years to come, but there’s no pending apocalypse where PCs become irrelevant. Yes, tablets and smartphone sales will increase while PCs become less popular, but the segment is far from being near death.

Yes, the possibility of losing Apple as a PC customer would definitely hurt Intel. Apple is its third-largest customer, after Dell and Hewlett-Packard (NYSE:HPQ[16]), and unlike the other two, Apple’s PC sales are on an upward trajectory.

However, nothing has been formally announced yet, and a chip switch would be risky for Apple. Software would either have to be rewritten for Apple computers using a new family of CPUs, or they would have to run code in “emulation.” Both options tend to lead to years of disruption and confusion for customers.

And even if Apple did switch, there’s nothing to say it would be forever. After all, Macs ran on IBM (NYSE:IBM[17]) PowerPC chips for years before Otellini — in a coup — wooed the company into switching to Intel in 2006[18].

I stand by my original opinion, even though things might just be a little less decorous at Intel than they may have seemed last week. Intel has cash, it’s investing heavily in R&D, it’s bringing in new leadership (likely someone who gets mobile) and it’s even reportedly doing the unthinkable — investigating the possibility of licensing ARM technology[19].

I still think that at $20, Intel is a good value.

As of this writing, Brad Moon didn’t own any securities mentioned here.

Endnotes:
  1. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  2. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  3. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  4. Intel’s $20 stock price as a buying opportunity: http://investorplace.com/2012/11/intel-down-now-but-will-come-back-strong/
  5. That viewpoint was shared: http://investorplace.com/2012/11/intel-value-or-value-trap-intc/
  6. by veteran tech writer Bob Cringely: http://www.cringely.com/2012/11/20/while-the-intel-board-was-firing-paul-otellini-they-should-have-fired-themselves-too/
  7. his take on the Intel situation: http://www.cringely.com/2012/11/20/while-the-intel-board-was-firing-paul-otellini-they-should-have-fired-themselves-too/
  8. surprising the board with his resignation: http://news.yahoo.com/intel-ceo-paul-otellini-retire-surprise-move-171724641--finance.html
  9. AMD: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMD
  10. ARMH: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARMH
  11. QCOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOM
  12. is estimated to carry a $28 price tag: http://news.cnet.com/8301-13579_3-57512904-37/iphone-5-may-cost-apple-$167.50-to-build-says-one-estimate/
  13. Core i7 Extreme goes for $999 in quantity: http://ark.intel.com/products/family/59135/2nd-Generation-Intel-Core-i7-Extreme-Processor/desktop
  14. 169 million smartphones: http://www.engadget.com/2012/11/14/gartner-phone-sales-q3-2012/
  15. 27.8 million tablets: http://www.idc.com/getdoc.jsp?containerId=prUS23772412
  16. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  17. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  18. wooed the company into switching to Intel in 2006: http://www.eetimes.com/electronics-news/4057779/Apple-offering-Intel-based-iMacs-ahead-of-schedule
  19. investigating the possibility of licensing ARM technology: http://www.forbes.com/sites/jeanbaptiste/2012/11/19/intel-ceo-fall-signals-move-to-arm-closer-ties-with-apple/

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