Intel’s 2Q13–the waiting game continues

2Q13 earnings

Intel (INTC) reported 2Q13 earnings results after the close on Wednesday. Revenue came in at $12.8 billion, down 5.1% year on year.  Earnings per share were $.39, flat quarter on quarter but off by 28% from INTC’s performance in 1Q12.  The figures were in line with the company’s previous guidance.

The company also lowered guidance for the second half, saying that this normally seasonally stronger period, while up vs. the first six months, won’t show its usual revenues gain.  INTC now sees full-year revenues for 2013 as flat–or about 2% lower than its previous view.

How so?

The cloud continues its explosive growth.  The server business is fine.  But the PC market is weaker than INTC expected.  For the first time INTC sees PCs as being as soft as consultants Gartner and IDC do.

During the quarter, INTC bought back 23 million shares of stock, paying an average of $23.91 each for them.

INTC shares were down almost 4% yesterday on the news.

the near-term investment case hasn’t changed much…

The big question is still whether the newest generating of INTC microprocessors, the first designed especially for mobile devices, will gain widespread acceptance.  A sub-plot, or maybe a necessary condition for this to happen, is the question of whether manufacturers of computer devices and operating systems are going to be able to deliver new “wow factor” products that people want to buy.

 

I’m content to hold INTC shares to see what happens, even though the tone of INTC’s comments suggests to me that we won’t see the new chips in full flower until early 2014.

..but INTC may be remaking itself in a more fundamental way

Yes, what I’m about to write may be making mountains out of molehills–but that’s what analysts do.

It looks to me that new CEO Brian Krzanich believes INTC is not in one, but rather in two, separate but complementary businesses.  One is researching and designing proprietary computer chips.  The other is manufacturing chips, either for itself or for others.

Although promoting foundry operations to equal status with making x86 chips is a simple and sensible change of viewpoint, it’s also potentially earthshaking for some INTC veterans.

I can imagine a lot of possible reasons (some of them mutually incompatible) for making this change of focus, but two consequences stand out to me.  Both derive from the fact that INTC is by far the most accomplished chip manufacturer in the world–one whose edge over the competition is increasing:

–to the extent that INTC picks and chooses the firms it makes chips for, it may be trying to turn the ARMH vs. INTC decision into an “eco-system” one.  A device maker can either have INTC parts + very fast, highly compatible chips from its partners or ARMH + a hodge-podge of less well-made, not so compatible parts from others.  Presumably this tilts the playing field considerably in INTC’s favor.

–investors like foundries better than chipmakers.  Look at the PE multiple on TSMC vs. INTC.    TSMC is 10% higher–even without considering the quirkiness of TSMC’s financials.