Tag Archives: Intel

thinking about Intel (INTC)

June 10, 2014 By in Recent Market Action, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , Leave a comment

I became interested in INTC in late 2011, when it was trading at under $20 a share and yielding well over 3%.  It was a good news/bad news story, where it seemed to me that only the bad news was reflected in the stock.  So, although I’m a growth investor (one might argue that because I’m a growth investor), I was attracted to the stock on value grounds.

The bad news then–and the continuing bad news today–was/is that INTC had missed the boat on processors for mobile devices.

The good news had two aspects:

–INTC had realized what a horrible blunder refusing Steve Jobs’ invitation to develop chips for the iPhone and was working to correct it.  In addition,

–INTC had a lead of a least a year, maybe two, over anyone else in cutting edge process technology (smaller, cooler, less power-hungry).  That advantage,INTC said, would quickly put it back into the mobile game–maybe as soon as 2012, certainly by 2013.

I reasoned that at 5x cash flow, 8x earnings, proprietary technology and a 3% yield, there was little downside.  So I bought some and began to write about the story.

The stock went to just above $28 a share within six months or so.  As the stock approached $25, however, I had to change my investment thesis to something more than “more bad stuff is unlikely, good things might happen, and I was being paid about a 30-year Treasury yield to wait.”

I thought $35 was a possibility if–as Paul Otellini the then-chairman said it would–INTC developed mobile customers quickly. At the same time, I recognized that if the company did not show mobile progress there was risk that the stock would reverse at least some of its gains.

Whoops!

A year later, the stock was at $19.10, below its year-earlier low.  Mr. Otellini, who by this time had announced that 2013 would join 2012 in the “nothing good to report” column, was out as CEO and the search was on for someone with a greater sense of urgency about INTC’s predicament.

déjå vu all over again

Brian Krzanich, a process engineer and a 30+-year INTC employee, is now the CEO.  The profit profile for this year and next–flat–hasn’t changed.   I can’t imagine the dividend being increased, although I can’t conceive of it being cut either over any reasonable investment horizon.  The next sea change in process technology is looking to be so expensive (triple the cost of the previous jump) that even INTC won’t go it alone–implying that INTC’s current edge in processing skill won’t last forever.

Nevertheless, INTC shares are trading above $28 again and flirting with the 2012 high.

Why?

Part of this is because the overall market is up sharply since 2012.  But INTC has been outperforming since shortly after Mr. Krzanich took the helm.  I think there’s good reason for this.  Mr.Krzanich is proving very nimble at using INTC’s technology to forge partnerships to get INTC the mobile knowhow and distribution it needs.

I think INTC is now in hands better suited to deal with INTC’s weakness in mobile. than it was in 2011, when I first bought the stock  There’s a considerable chance, I think, that INTC will make a successful transition to smartphone and tablet supplier, with profit increases to show for it in 2016.  $35 a share still sounds like a good price target to me.

Nevertheless, as was the case in early 2012, INTC is no longer the “no-brainer” it was in late 2012.  I’ve just sold about 20% of what I bought under $20 and I’ll likely trim a bit more.

 

 

 

Intel (INTC) and next-generation semiconductor plants

March 26, 2014 By in Current Market Thoughts, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , 1 Comment

We’re living in a time of immense structural change.  For investors, the internet-led waning of established brand names and bricks-and-mortar distribution networks and the loss in value of existing manufacturing plant and equipment as new factories spring up in developing countries are among the most important.

One exception to this trend has been in semiconductor production.  There the engineering knowhow required to run the factories is very high and the pace of change has been very swift.  In addition, the cost of building a new fab is prohibitive for most:  a current-generation plant costs about $3 billion.  If a firm wants to fill the plant exclusively with its own chips, that requires annual sales of $7 billion or so.  In other words, only INTC and Samsung are big enough and rich enough to afford their own plants and the technological edge that brings.  Everyone else has to use third-party contract foundries like TSMC.

INTC currently has maybe a two-year lead over other semiconductor manufacturers in process technology.  It can make smaller, faster, less power-hungry chips than anyone else.  To preserve this advantage, the company has been making preparations–including funding research by equipment manufacturer ASML–to be the first out of the blocks with plants running new “extreme ultraviolet” technology and processing much larger silicon wafers to boot.

What has come to light very recently, however, is that these new factories are going to be mega-expensive, at $10 billion apiece or more.  As things stand now, that makes building one of them a bet-the-company move for anybody, even an industry giant like INTC.

Where to from here?

It’s not 100% clear, to me anyway, but:

–extreme ultraviolet lithography is probably at least a half-decade away, not a 2017 event as previously thought.  This means R&D and capital spending will be spread over a much longer period of time.  All other things being equal, this will mean higher cash generation by INTC.

–absent a significant cost-reducing breakthrough in EUL, INTC will likely partner with at least one other party to fund a next-generation fab.  Partnering could either be with other chipmakers or with one or two large deep-pocketed users of chips.   …AAPL?  …MSFT?

–it’s conceivable that INTC will itself end up with a substantial foundry business manufacturing chips designed–at least in part–by third parties.  One might argue that this would be a come-down for the premiere manufacturer of proprietary microprocessors.  However, the best foundry, TSMC, trades at a substantial PE premium to INTC even though its technology is inferior.  So morphing into a foundry could easily add a quarter or a third to INTC’s stock price.

3Q13 earnings for Intel (INTC): the wait continues

October 16, 2013 By in earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , Leave a comment

I’m on the road today, so this will be brief.

Yesterday after the market close, INTC reported earnings for 3Q13.  EPS were $.58/share, considerably above the Wall Street consensus of $.53.  Initially, the stock was up by around 2% in the aftermarket on this news.  Then it reversed course and lost about 2%.  Symmetrical, but not wonderful.

As I see it, the news can be divided into two halves–current market conditions and INTC’s future viability as a chip firm.

The near-term bucket is looking good.

–The high speed and cloud server businesses continue to boom, and now make up at least half of INTC’s total server revenues.

–Regular old corporate servers are even starting to pick up.

–The middlemen and OEMs that INTC sells its PC chips to are slowly starting to build their inventories in response to a bottoming of the PC market in the US and the EU.  Stocks, however, still remain smaller than normal, so there’s more improvement to come.

–More tablets will be appearing over the coming weeks with INTC chips inside.

4Q13 eps, traditionally a big quarter for INTC on holiday sales, will be flattish with 3Q13, on revenues up only slightly, quarter-on-quarter.

The future. on the other hand, has once again been pushed out–this time for another year, until 2015.

INTC’s industry-leading 14 nanometer chips have been delayed by a manufacturing glitch for three months until January.  So their higher speed and lower power use won’t be available during this holiday season.  To my mind, this is not a big deal.  On the other hand, during the conference call that accompanied the earnings announcement, CEO Brian Krzanich said he doesn’t think INTC can make its manufacturing operations as flexible as they need to be to respond to customer needs for another year to eighteen months.

This contrasts with the comments of former CEO Paul Otellini, for whom full competitiveness with rival chipmaker ARM Holdings was always just a quarter or two around the corner.

In hindsight, Otellini had a habit of being too optimistic.  In contrast, Krzanich, as a new CEO, has no incentive to make promises he can’t keep.  His best course of action is to underpromise and overdeliver.

The bottom line, however, is that the turnaround holders like me are hoping for has once again been pushed out.  That’s why the stock is down in the pre-market this morning, though not by as much as it was last night.

I’m content to hold and collect the dividend.

Intel’s 2Q13–the waiting game continues

July 19, 2013 By in earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , Leave a comment

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.

 

 

current Intel (INTC) strength

June 17, 2013 By in Current Market Thoughts, Recent Market Action, Stock ideas Tags: , , , , , , Leave a comment

I haven’t had the time over the weekend to give the topic of the 21st century stock market cycle will look like the time and attention it deserves–tomorrow, I hope.  Fathers Day with my family and the wedding of the daughter of close friends have shattered my good intentions.  A brief note about INTC instead.

INTC

INTC has been a pretty terrible stock in the two years or so I’ve owned it.  Yes, it has gone up.  But so has the market–and the latter by a much larger amount.

INTC made an immense leap from just above $19 a share in August 2011 to briefly stick its head above $28 in April 2012.  But then it gave just about all the advance back as it became clear that no major manufacturer of mobile devices was going to take the chance last year of putting INTC microprocessors in its devices.  INTC chips were still too big and too power-hungry, despite the enormous amounts of money the company had spent–and continues to spend–on R&D and new production facilities.

differences today

A year later, the story is basically the same, waiting for success in the mobile arena, with four differences:

–the market appears to be rotating away from high-dividend defensive issues toward the tech sector,

–INTC’s newest chips are smaller, much more powerful, generate less heat and use less battery than last year’s

–PC makers appear to be making a competitive response to the appeal of tablets (cheap + instant-on) by lowering prices and coming out with tablet-like devices that have significantly more power, and

–INTC has its first “real” customer for a tablet chip–Samsung.

It isn’t all clear sailing yet for INTC.  Some holders, fearing a repeat of the price action of 2012, will be tempted to declare victory and sell.  So far, they’re in the minority.  As for me, I’m content for now to wait and watch.