Tag Archives: Intel

Intel (INTC0 and Altera (ALTR): implications

March 31, 2015 By in Industry Analysis, semiconductor manufacturing, Technology Tags: , , , , , , , , , Leave a comment

What can we conclude from INTC’s interest in acquiring ALTR?

–when I became interested in INTC as a stock a couple of years ago, it seemed to me that the firm could be viewed as having two businesses–a high-growth one selling servers and a low-growth, cash cow one selling chips for PCs.   At the time, I thought the server business alone more than justified the then stock price, and that the PC business was mainly important for its contribution to overhead and its free cash flow generation.  A desire to acquire ALTR seems to confirm that this is also INTC management’s view.

–good companies periodically reinvent themselves.  After a period of stagnation, this appears to be what INTC is doing

–the threat of low power servers run by ARM chips is serious

–my guess is that a bid will take the form of all or mostly INTC stock.  An all or largely cash offer would imply either that INTC thinks its shares are deeply undervalued, that debt financing is too ridiculously cheap to pass up, or that long-suffering ALTR shareholders want  to declare investment victory and move on.

–an INTC-ALTR merger spells trouble for Xilinx (XLNX), the main competitor to ALTR

–the main source of value in ALTR is its software.  Assessing that, thorough accumulated R&D spending, is the key.

Numbers tomorrow.

Intel (INTC) and Altera (ALTR)

March 30, 2015 By in Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , Leave a comment

Late last Friday afternoon a rumor reached Wall Street that INTC is in talks to acquire ALTR, causing a sharp rally in ALTR shares and a modest one in INTC’s.  In hindsight, INTC appears to have been headed down this path for a couple of years, as a prescient article in the Electronic Engineering Journal (titled “When Intel Buys Altera”) pointed out last June.

Why a deal is potentially crucial for INTC:

1.  what ALTR does:  The company is one of the two dominant makers of Field Programmable Gate Arrays (FPGAs)–the other is Xilinx.   FPGAs are logic devices.  What makes them unusual is that they contain software that can be updated, revised or reprogrammed after the servers or telecom equipment (the two big markets for FPGAs) they’re in have already been built and installed.  The traditional upside of FPGAs is that they allow customized equipment to be put into the field and fine-tuned quickly.  Their downside is they’re more expensive than the pure-hardware alternative, ASICs (application-specific integrated circuits).

2.  INTC and Moore’s Law:  A factory to make current-generation INTC chips costs about $3 billion – $4 billion.  A next-generation factory, using much different equipment, will cost maybe $14 billion.  Samsung has already said it will build one; INTC says it’s too risky to build one by itself.  How, then, does INTC retain its technology/speed advantage over rival chipmakers?

3.  an INTC chip + a FPGA:  as reported in the EE Journal, INTC says linking an INTC microprocessor with a FPGA in a server can boost performance by 10x.  Bind the interface between the two closely enough can double performance again.

In other words, INTC + ALTR = huge step forward in chip performance.

why a merger and not a joint venture?

To my mind, the risk to both parties is too high for a joint venture.  INTC would have its lucrative server business in jeopardy if it committed to the FPGA route and the parties ever parted.  ALTR would have to devote a lot of resources to making its programming tools easier to use, potentially diverting attention from its telecoms customers.

More tomorrow.

 

 

3Q14 for Intel (INTC): keeping the faith …or not

October 16, 2014 By in Current Market Thoughts, earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , Leave a comment

INTC reported 3Q14 results after the close on Tuesday.  Earnings per share came in at $.66, which beat the brokerage house analyst consensus by $.02.  The company’s guidance for 4Q14 exceeded analysts’ expectations as well.

The stock gained about 3% in the aftermarket   …but plunged at the open yesterday.

There are two main points at issue, as I see it:

oversupply?

1.  Some analysts think INTC’s outlook is too bullish.

a. Last Thursday, Microchip Technology (MCHP), a maker of a broad range of commodity semiconductors, warned that its 3Q14 would be weaker than it had previously thought.  The reason:  weakness in China in September.  The company also predicted that a general semiconductor industry downturn is now beginning.

MCHP is saying,  in effect, that it is in much better touch with end users of its products than most other semiconductor firms, including INTC.  It records revenue only when an end-user buys a chip from a distributor–not when the chip leaves the factory, which is the common industry practice.  It believes others will soon figure out they have much too much inventory floating around in their distribution systems (already booked as revenue) and will be forced to cut back production to bring them back into line with demand.  If so, MCHP is sort of like the canary in the coal mine for chipmakers.

b.  INTC recorded healthy growth in its PC business.  Third-party research services like IDC say demand was basically flat.  Is INTC inadvertently stuffing the channel?

INTC’s response to this worry is:

–it’s a specialized maker of microprocessors

–corporate demand is strong, partly because Microsoft (MSFT) has stopped supporting Windows XP, but also because corporations are beginning to replace the now-decrepit PCs they’ve been duct taping back together for a decade.  This trend will last for a long time.

–third-party researchers like IDC are fine for tabulating demand in the US and the EU, but can’t easily see the businesses of no-name computer makers in the emerging world who are strong INTC customers.

–yes, inventories are higher today than they were a year ago, but they’ve just returned to normal from extremely low levels.

mobile?

2.  INTC’s mobile chip business is losing $1 billion a quarter, even as the company has become the second-largest vendor of tablet microprocessors in the world.  Can this end well?

The company has gone from a standing start to having chips in maybe 40 million tablets being made this year.  It is concentrating on low-end tablets in emerging markets, entering into long-term R&D and development arrangements with Chinese firms–and, for now at least, more or less giving its chips away to get them into machines (the reality is more complicated).

The company thinks it can begin to whittle away at those losses, beginning next year.  Profitability in 2016?  My guess is yes, but who knows?

my take

If INTC is ever going to crack the mobile market, the time is now and the company’s strategy is sound (it’s also the only one I see available to it).  Suppose it loses $5 billion on the effort and has to reassess.   Not good   …but then $5 billion represents only about 3% of the firms stock market value.  A risk, yes, but one worth taking, I think.

The cyclical downturn thesis is more worrying. When it comes down to it, though, I’m unwilling to generalize from MCHP’s business softness.  Arguably, the weakness MCHP is seeing comes from the Beijing orienting the economy away from construction and low-end commodity-like activities.  The move to higher value-added business should mean greater demand for microprocessors, not less.  So on this front, too, I’m willing to give INTC the benefit of the doubt.

The stock is trading at 15x earnings (high for it but a discount to the market) and yielding a tad under 3%.  If I had to put numbers to my thinking, I’d say that, in the absence of a serious semiconductor swoon, downside is to $25.  Upside if tablet losses begin to abate in 2015 is maybe to $45.

If I thought upside and downside were both equally probable, I should have been a seller at $35.  I wasn’t.  I’m now guessing that upside/downside has deteriorated from 2/1 to each equally probable.  But at $31, I’m still a holder.  I’m not a buyer, though.

 

 

 

 

 

a closer look at Intel’s 2Q14

July 18, 2014 By in cloud services, earnings conference calls, internet, semiconductor manufacturing, software, Stock ideas, Technology Tags: , , , , , Leave a comment

2Q14 results

After the close of Tuesday, Intel (INTC) reported a strong 2Q14.   Revenue came in slightly higher than the company’s upwardly revised guidance from last month.  Earnings per share were $.55 vs. Wall Street analysts’ expectations of $.52 (expectations which were revised upward when INTC announced in mid-June that business was looking up).

INTC also revised up its full-year revenue guidance from basically flat year-on-year to +5% growth.  It said that its server business ($3.5 billion of the company’s $13.8 billion total during the quarter) continues to boom, with both unit volumes and unit prices rising.  That’s no surprise.  In addition, however, the PC business ($8.7 billion in 2Q14 sales) appears to have bottomed and to be bouncing back a bit.

The PC development has two aspects.  Corporate customers, who make up about 40% of the PC total, are buying again.  The simplest explanation for this is that their existing laptops and desktops have just gotten too old.  Buying may also be spurred by the fact the Microsoft is ending support for Windows XP, that corporations don’t regard tablets as a viable substitute for laptops, or simply that firms are flush with cash.  In any event, corporates are buying, and will easily continue to do so in increasing amounts into next year.

Consumers, 60% of the total PC market, may also be showing signs of life–although this is more OEM and distributor body language than actual orders.

Remember, too, that INTC’s sales are not to end users.  So it stands to benefit not only from increased final sales but also by manufacturer and distributors purchases to built up bare-bones inventories.

operating leverage

INTC has substantial operating leverage, both from the capital-intensive nature of its manufacturing and its very large R&D and SG&A budgets.  As a result, small changes in revenue can make a disproportionately large impact on the bottom line (in fact, they’re almost pure profit).  At the moment, the revenue changes in INTC’s two main businesses, PCs and servers, are both positive.

tax rate

INTC is saying it  expects its tax rate to remain at 28% for the rest of the year, implying that the growth it is seeing is mostly coming from the developed world, where tax levies are relatively high.

lines of business

As is always the case in securities analysis, the line of business table is where the real work is done.  For INTC, I’ve duplicated the relevant 2Q14 lines below:

PC Client Group :    revs = $8.667 billion, op income = $3.734 billion

Data Center Group :   revenues = $3.709 billion, op income = $1.807 billion

Mobile and Communications Group : revenues = $51 million, op income = ($1.154 billion).

No, that’s not a mistake.  INTC’s tablet and smartphone chip business had revenues of $51 million for the quarter …and an operating loss of $1.2 billion.

INTC is earning operating income of $22 billion – $25 billion a year from its traditional businesses and using a chunk of that to fund the massive losses it is incurring in trying to break into the mobile computing business.

The M&C Group figures need some interpretation.  The revenue figures are net of marketing or other incentives INTC gives to buyers of its mobile chips; the operating loss includes R&D and other expenditures that arguably have an enduring value.

Nevertheless, the line of business table does convey the essence of the INTC story for shareholders wiling to pay $30+ for a share of stock.  INTC is, in effect, two companies:

–one is a mature microprocessor maker earning $2.50 or so a share and growing at maybe +10% a year

–the other is a startup currently bleeding red ink at a $4 billion annual rate.

my take

The fact that INTC is incurring large near-term losses on its M&C Group says two things to me:

–it doesn’t yet have a set of products customers are willing to actually pay for, and

–INTC believes M&C is crucial to its long-term success.

I might be persuaded to pay 15x earnings for the traditional business, if I thought it would have stable-to-rising earnings.  That would mean a target price in the high $30 range.  However, INTC’s actions imply that top management doesn’t believe the business is viable without M&C.  So maybe the right price for the traditional business would be $30.

That leaves the question of the status of M&C still up in the air, though.

On the other hand, if INTC can create a profitable mobile business, that would mean–to pluck numbers out of the air–total INTC near-term earnings could be $3 a share, with a higher growth rate.  Worth $45 a share?  …probably so.

My bottom line:  news of a cyclical upturn in the PC and server businesses probably supports INTC shares for the time being.  Eventual downside to the high $20s (?) if/as it becomes clear the mobile chip business has no hope.  Upside to $40+ on signs that INTC is narrowing its M&C operating losses.

I find it hard to assign probabilities to either outcome.  For the time being I’m content to remain a holder of the stock.

 

 

 

 

 

 

 

 

 

Intel (INTC) revises up 2Q14 guidance

June 13, 2014 By in Current Market Thoughts, Industry Analysis, semiconductor manufacturing, Stock ideas, Strategy, Technology Tags: , , , , , , Leave a comment

rising guidance

I may have been a few days too early in my post suggesting trimming positions in INTC.  I still think the idea is right, but my timing now appears to have been less than optimal.  …oh, well.

How so?

After yesterday’s close, just before entering its quiet period on June 17th–where it won’t talk about near-term business prospects until releasing 2Q14 earnings on July 15th–INTC revised up its guidance for the quarter by a significant amount.

the details

Prior guidance was for 2Q14 revenue of $13.0 billion,  That figure rises to $13.7 billion, a +5% change.  It’s based on increased demand for business PCs.  The expected gross margin goes up by a percentage point, and expenses rise slightly, both because of increased unit volume.  The tax rate also increases from 27% to 28% for the remaining three quarters of the year.

Full year revenue expectations go from “flat” to “some” revenue growth.

significance?

For INTC, this is the first sign of life in its core PC operations for some time.  That’s probably more important than the fact that gross profits for the quarter are coming in about 7% higher than the company had expected.  The wording of INTC’s press release makes me think that this is a relatively recent development, and that the company is hopeful the increased sales are not a flash in the pan, but would prefer to wait at least another month before saying so.

The rising tax rate suggests to me that the new business is predominantly in the US.

If this sales increase is not just a blip, it has wider implications, as well.  It suggests that US corporations must be starting to feel pretty good about their business prospects.  Yes, there have been incredible advances in laptop performance and design over the past half-decade.  But during the recession and recovery, corporate PC upgrades have been low priority, “luxury” items–sort of like getting new office furniture.  A widespread move to get rid of  the old clunkers would imply a return to more normal spending patterns.

INTC shares are up by about 6% in pre-market trading.  It will be interesting to see if the strength lasts–and if the INTC press release sparks comments from PC makers.