For the past five years, if you wanted to buy Microsoft’s (NASDAQ:MSFT) Surface, you indirectly dealt with Intel (NASDAQ:INTC). That’s because the latter supplied chips for the former’s hybrid-tablet product. However, this relationship might change. If you own Intel stock, it’s a reason for concern. Here’s why.
At the moment, it’s only a rumor.
However, if the rumor is accurate, Microsoft is negotiating with both Advanced Micro Devices (NASDAQ:AMD) and Qualcomm (NASDAQ:QCOM). A potential deal would involve these two companies integrating their processors in at least two of Microsoft’s Surface Pro products.
According to Petri.com’s Microsoft expert Brad Sams, the Seattle-based company is dissatisfied with Intel’s recent products. That dissatisfaction apparently led management to consider diversifying away from Intel to other chipmakers such as AMD and Qualcomm. Sams stated in a recent report.
With Skylake, Microsoft got burned by the immaturity between Windows and the chips which resulted in faulty hardware and a serious black eye to the brand’s high-quality reputation.
TechRadar contributor Matt Hanson reminded his readers recently that Microsoft is using AMD chips for its new Xbox Scarlett console. Additionally, Qualcomm is working with Microsoft on Windows devices powered by Snapdragon processors.
Intel’s loss could be AMD and Qualcomm’s gain. If this negative momentum picks up, it could hurt INTC stock badly.
That said, it’s unlikely under any diversification scenario that Microsoft would completely abandon its relationship with Intel.
So, it begs the question: is this rumor indeed a problem or a case of making a mountain out of a molehill?
It’s a Problem for INTC Stock
AMD continues to make strides under CEO Lisa Su’s excellent leadership and vision. As I stated at the end of May, since Su has been at the helm of the company (October 2014), AMD stock was up 669%. That’s more than 10 times the SPDR S&P 500 ETF (NYSEARCA:SPY) over the same period.
Without question, she’s a difference maker. So, the fact that AMD is making inroads with Microsoft suggests CEO Satya Nadella and the management team view AMD as a legitimate alternative to Intel.
That’s not good news for Intel stock.
As for Qualcomm, it continues to develop high-performance Snapdragon system-on-chip (SoC) processors for Windows-based laptops. Although early results haven’t been great, the fact a second company is breathing down Intel’s neck causes significant concerns.
It’s a Bump in the Road
The one thing I’ve learned in my years covering stocks is that the good news isn’t nearly as good as the longs believe. Conversely, the bad news isn’t nearly as bad as the shorts think. Usually, the truth lies somewhere in the middle. Thus, it’s not a reason to panic on INTC stock.
The fact that Microsoft is working with other companies represents a subtle, but necessary message. Essentially, it’s a way of saying that MSFT expects better products from a company as formidable as Intel. If Intel opens to this constructive criticism, it will get to work, creating products that Microsoft’s Surface customers will appreciate.
The other thing to remember is that Surface is a tiny piece of Microsoft’s business.
True, Surface products saw revenues increase by 21% in the third quarter (25% excluding currency) to $1.33 billion. However, that only accounted for 4.3% of Microsoft’s $30.6 billion in quarterly revenue.
The Surface likely will never be a big part of Microsoft’s business. That role belongs to its cloud business and the various related businesses involving artificial intelligence and machine learning.
In other words, the optics for Intel stock are worse than the financial implications.
The Bottom Line on Intel Stock
In early June, I recommended that for investors willing to hold Intel stock for the next five years, buying in the mid-$40s wasn’t a bad idea given its prospects. However, for those with a shorter timeframe, I suggested waiting. If INTC fell into the $30 range, it would provide a measure of safety.
However, since that article, the Intel stock price has jumped almost 10%, putting the $30s temporarily out of reach.
Would I still buy INTC stock for a five-year hold given the Surface rumors?
I think I would.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.