Intel TV Smells of Desperation

by Kevin Kelleher | March 15, 2012 12:23 pm

Like an aging celebrity looking to revive a career on Dancing With the Stars, Intel (NASDAQ:INTC[1]) appears to be pinning its future hopes on television. The Wall Street Journal reported this week that Intel is developing an Internet-based pay-TV service. And like many of those celebrities, it only makes Intel look desperate.

It’s an unexpected move — so unexpected it seems a little curious. Intel, the longtime semiconductor giant that is a central part of Silicon Valley history, positioning itself as a cable company?

But while Intel hasn’t publicly acknowledged its foray into pay-TV yet, the company is serious enough about becoming a “virtual cable operator” this year that would offer TV channels over the Internet that it has been asking media-content owners for rate quotes.

Analysts weren’t quite sure what to make of the news. Zacks Equity Research noted that cable, satellite and telecom companies that offer pay TV — including Time Warner (NYSE:TWX[2]), Comcast (NASDAQ:CMCSA[3]) and AT&T (NYSE:T[4]) — spend nearly $38 billion per year to license TV channels. Others like Netflix (NASDAQ:NFLX[5]) and Hulu, which offer movies and TV programs online without a cable-like service, are finding making deals with content providers a tough prospect.

And with tech giants like Apple (NASDAQ:AAPL[6]) and Google (NASDAQ:GOOG[7]) also offering Internet-based TV services, Zacks said competition will be “fierce” and that Intel “might have to bear even higher costs.” Bernstein Research was less kind: “It sounds like they’re almost there. They’ve got the set-top box concept down. Now, all they need is … everything else. Content, for example … Good luck and Godspeed, Intel.”

It’s also yet another about-face for Intel in the market for consumer technology. While the company continues to make chips for set-top boxes, it shuttered its Digital Home Group last October. Only eight months earlier, Intel had high hopes for that division, which pushed Internet-connected smart TVs.

And that wasn’t the first time Intel had boldly entered — then quickly retreated from — a consumer market. In January 2001, nine months before Apple began selling the iPod, Intel unveiled a digital music player. But even before the iPod’s arrival, Intel said it would wind down the MP3 player division.

Intel has had a good run over the past year. The stock is up 32% in the past 12 months, much better than the 10% gain in the Dow Jones Industrial Average. But in recent months, a number of firms — including JPMorgan, Barclays Capital, Sterne Agee and Kaufman Brothers — have downgraded Intel’s stock. Slack demand for chips in the first half of 2012 and weaker profit margins were among the reasons cited for the downgrades.

But while the slowing growth of the PC market presents a threat to Intel, the company has some longer-term factors in its favor. It has been branching into other areas[8], such as chips for tablets and mobile devices. It is close to new product cycles, such as its Romley server chip and long-awaited Ivy Bridge processor, as well as the anticipated release of Microsoft‘s (NASDAQ:MSFT[9]) Windows 8 operating software[10].

And over the past couple of years, Intel has been steadily raising its dividend. Intel’s dividend stood at 14 cents per share in 1999, but increased to 15.75 cents in 2010 and 21 cents last July, currently yielding 3% and ranking among Societe Generale’s top 40 dividend payers in the world[11]. And INTC is trading at 11.4 times its historical earnings and 10.5 times its estimated 2013 earnings. The average P/E for stocks on the S&P 500 is close to 16.

What’s more, there are signs that 2012 might not be as weak for Intel as some analysts were expecting earlier. In December, Gartner Inc. forecast that worldwide semiconductor revenue would increase 2.2% in 2012 as inventories among buyers corrected themselves. On Wednesday, Gartner increased that estimated growth rate to 4%, thanks to a stabilizing global economy and a rebound in demand for DRAM and NAND flash memory chips. PC unit production would increase 4.7%, Gartner said, with demand coming from emerging markets.

In that case, Intel bulls might have something to look forward to besides a costly cable TV-like operation from a chipmaker. Intel can back away from consumer markets once more, and focus on rising demand for chips. Intel’s PC client group accounted for 66% of its total net revenue last year and 85% of its operating income.

As of this writing, Kevin Kelleher did not hold a position in any of the aforementioned securities.

  1. INTC:
  2. TWX:
  3. CMCSA:
  4. T:
  5. NFLX:
  6. AAPL:
  7. GOOG:
  8. branching into other areas:
  9. MSFT:
  10. Windows 8 operating software:
  11. Societe Generale’s top 40 dividend payers in the world:

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