by Jeff Reeves | November 28, 2013 6:01 am
Intel (INTC) was my pick for our best stocks of 2013 contest at InvestorPlace, and things started the year just fine. INTC raced up about 30% in just a few months, and with a nice dividend yield the investment was sitting pretty.
However, things have gotten rocky in the second half of the year. And though Intel stock is still up about 20% in 2013, this tech giant is not a safe bet for the new year — so any investors camping out in INTC should take the money and run.
And if you’re looking for new investments in the new year, steer clear of this tech stock.
Here’s why Intel is a bad bet:
It’s no secret that Intel has been late to the mobile game, with its designs lagging behind rivals like ARM Holdings (ARMH), Qualcomm (QCOM) and Broadcom (BRCM). But the problem lately has been that INTC continues to spend big to prime the pump with very limited results thus far — and no immediate impact on the bottom line.
A new line of low-power chips that Intel is calling Bay Trail seems to be winning over some manufacturers; however, the line still is limited to also-rans — tablets from Hewlett-Packard (HPQ) and Toshiba (TOSBF), for instance, without a single big-name smartphone like the Apple (AAPL) iPhone.
Intel is investing big in mobile, as it should, but none of those investments are even close to paying off in 2014 based on this year’s slow progress.
Furthermore, mobile chips simply don’t command the same margins as the old PC chips did. Meaning that if Intel is getting a fifth or a tenth of the profits on these mobile chip lines, INTC needs to sell 5x to 10x more product to hit the same numbers.
That compounds the need for mobile growth, and the impact that the transition will have on INTC stock in 2014.
One of the most compelling reasons to invest in INTC is its massive 3.7% dividend yield — a heck of a number, especially for a tech stock. But Intel’s dividend growth has slowed immensely, so there’s no guarantee that income stream is going to get any bigger.
Consider that in 2003, INTC stock paid 2 cents per quarter. It now pays 22.5 cents — a 1,150% increase in just 10 years! But before you get all excited, remember that the most recent increase to Intel dividend payments was from 21 cents to 22.5 — a miserly 7% hike.
The rate of dividend growth has been slowing for some time at Intel. That’s not a death knell, of course, but if the stock continues to go nowhere, then you have to wonder what INTC has to offer beyond the current yield.
And if the stock goes lower? Well, even a 3.7% dividend yield in INTC stock is cold comfort.
RBC Capital Markets recently downgraded the chip giant from “outperform” to “sector perform” with a lowered target of $26 a share instead of $27.
That comes after Cannacord Genuity put a $22 target on shares with a “hold” rating after INTC lowered its guidance at an analyst event.
These moves are a reflection of broader sentiment around Intel stock — not that the company will crash, but just that the best days of INTC might be behind it.
To me, the most telling sign of decline isn’t the stagnant revenue or the lowered guidance. These are symptoms of a bigger shift in the business — namely, that Intel is making more chips for other chip designers instead of producing its own designs.
So-called “fabless” companies make their money creating innovative chip specs, then simply outsourcing the production to other facilities. And while Intel has long been reluctant to team up with rivals that compete with it on the design front, the fact that it is running under capacity and the need to create more revenue has led INTC to new foundry partnerships — even if that means producing the chips that gadget companies preferred over Intel’s own.
In fact, many reports indicate Intel will team up with both ARM and rival Taiwan Semiconductor (TSM) in 2014.
This is the root cause of lower margins, revenue and momentum for Intel stock.
Now, Intel still has a scale that’s unmatched in semiconductors and is the No. 1 foundry in the world. And it’s also worth noting that with a forward P/E of about 12, INTC boasts a low earnings multiple compared with many other tech issues these days.
But that might be because growth will be very hard to come by given the shift to lower-margin fabrication instead of design and innovation.
After all, the new CEO of Intel, Brian Krzanich, is widely regarded as a manufacturing expert first and foremost. It’s logical for many investors to see this as a nod to Intel’s future as a manufacturer of chips more than a designer of chips.
There’s nothing wrong with that, since semiconductor fabrication is a reliable business — and one that will continue to support a robust and stable dividend for Intel as the company cranks out all manner of electronic components for an increasingly high-tech world.
However, home-grown chips have the biggest margins. And if INTC is simply going to rely on other people’s good ideas to get ahead … well, investors will have to seriously adjust their expectations for the stock.
Because a name that was once synonymous with the computer biz will be very much beholden to the new tech leaders in 2014.
In stark contrast to its famous “Intel Inside” campaigns, INTC is going to be on the outside looking in for some time.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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