Intel (INTC) will probably report a very good fourth quarter of 2010 on Thursday, January 13, after the market closes. The Wall Street consensus is looking for 50 cents a share. That would be up 22% from the fourth quarter of 2009.
I think Intel is likely to make that number. That would very good result for a stock that’s trading at just 11.1 times trailing 12-month earnings.
And I don’t think it’s going to matter much at all. Investors have pretty much decided that Intel is a has-been chip stock.
Think about why this stock trades for just $21 and change.
Intel’s earnings are projected to grow by 93% in 2010, but hanging over that projection—and the reason that it’s not reflected in the share price—is a conviction among analysts and investors that the computing market has left Intel behind. Intel may remain the king of the hill—all right, the emperor of the hill—in the market for desktop and laptop PCs and for servers. But in the new world of computing via tablets (Apple’s iPad and its competitors) and via smart phones, Intel is just another chipmaker. And one without the market share of an ARM Holdings (ARMHF) or the style-points of the A4 chip, designed by Apple and manufactured by Samsung that powers the iPad.
With the market moving away from Intel’s core strength, the company will soon be dead in the water, according to Wall Street. Projections for 2011 show earnings declining by 2.2% for the year. And that’s why a stock with 93% projected earnings growth in 2010 sells for just $21 a share.
The truth, in my opinion, is a little more complicated. Intel knows where the market has moved. That’s why it came up with the Atom, a chip designed precisely for the new devices. The Atom hasn’t got much traction in the market yet, but anyone who has followed Intel for years knows that the company’s strategy is to put out a competitive chip and then every 18 months come up with a faster, more powerful chip to replace it. And thanks to Intel’s amazingly deep experience with chip manufacturing—and its deep pockets—this steady march of chip generations will eventually wipe out all but the most deep-pocketed of competitor.s
At least that’s how it has worked in the past.
The real reason not to own Intel now isn’t because the company is indeed done. Or because it’s long-time partner Microsoft (MSFT) has just announced that it will work with ARM. Or that it’s strategy won’t work this time.
It’s because this time the strategy is going to be really, really expensive. It’s one thing to outspend and out-manufacture an Advanced Micro Devices, (AMD), Intel’s long-time punching bag in the PC market. It’s quite another to outspend and out manufacture Samsung and an entire new generation of competitors such as Qualcomm (QCOM).
Can Intel win this round? Certainly. Can it do it while delivering the 66% gross margin that the company achieved in 2010? No way.
So what investors are looking at is as prolonged battle for the fastest growing part of the market, which will see sales growth slow at Intel from 24% to 8% in 2011, according to Standard & Poor’s and that will see gross margins come down to 62% in 2011 and operating margins fall to 31% in 2011 from 37% in 2010.
Of course, most companies would give just about anything for margins like those, but for a while Intel won’t be rewarded for beating all those companies but punished for not outperforming its own history.
I’d say that at these prices Intel is now a great value buy—except that I can’t give you any idea of how long it might be before the stock market decides to see the value in the stock.
When sentiment is this strong against a stock, I think it’s best to step aside. (Unless you can find someone to give you one of those deals that Warren Buffett manages to strike where you get to buy a value stock at a huge discount and someone tacks on an 8% yield so you get paid while you wait. But I haven’t seen one of those cross my desk lately.)
As of January 12, 2011 I’m selling Intel out of my Jubak’s Picks portfolio with a gain of 1.8% (plus dividends) since I added it to the portfolio on January 15, 2010. (Intel is set to pay a dividend of 18 cents a share on March 1, 2011 to shareholders of record on February 7, 2011.)
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Intel as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/. I’ll have the fund’s portfolio as of the end of December posted in a few days.
greedibanks: at least for me, the time frame for waiting for a nice bump in the price of Intel is not anywhere close to 3-4 years. More like 30-90 days. There may well be faster money out there but in tech it is “here today gone tomorrow” so often that buying an Intel on the cheap is a pretty good bet. I don’t know where you got that saying “being early is being wrong” but it’s impatient and dangerous thinking to my mind. A 25% return in a year is mostly just as good if it happens on the last day of the year as it is if it happens on the first unless you are far more adept at timing than pretty much anyone on the planet.
A caveat with Intel is of course that you must remember it is cyclical. If you do not take profits when it gets too expensive you will likely give them back. Hogs get slaughtered in all tech names sooner or later. AAPL investors are about to find that out Tuesday morning.
Jim is as wrong with this call as he was with Potash. He has had a pretty decent track record over the years but I fear he is under pressure to make too many calls now that he is part of the Wall street selling machine. Time will tell I guess.
best of luck to you.
Okay so now that all the shouting is over, we see that in fact Jim was pretty much right. Intel true to form went nowhere after earnings however stocks like ASML benefitted (see Jim’s posts on that) (and I’m glad I owned some ASML). I would say his reasoning was spot on. and no regrets. I mean, think. Maybe it is a great company but do you want to tie up say 10k in the stock for 3 or 4 or 5 years waiting for it to come around? –the old saying is “being early is being wrong” in stock picking And keep it for the dividend? Unless you have 1 mill plus nest egg, it’s not a serious dividend candidate.
Oh! Interesting twist. I just read on engadget.com that that GSM version of iPhone is bases on what?. Right! Infineon chipset! 🙂
Does your Intel sell recommendation apply to your Dividend Income Portfolio. If so why not?
As a newly semi-retired educator, I’ll gladly be patient and keep my shares of INTC for the dividend…long term hold for me! If it drops into the $18.00 range again, I’ll pick some more up unless I’m missing a better dividend opportunity elsewhere…
“2010 was the best year in Intel’s history. We believe that 2011 will be even better,” said President and CEO Paul Otellini. Nice!
I guess it depends what you are looking for in a stock but a fantastic company like Intel at a 10pe and a 3.3% yield with 15% of it’s price sitting in cash seems like a pretty decent bet to me. I have said this before on Jim’s site but time and again Intel has been counted out as behind some new rival or technology and yet they continue to innovate and are earning more than ever.
I wouldn’t get crazy here and bid it up over 30 but I could be happy with the dividend, which they keep raising by the way, and a few dollars on the stock.
Jim I do believe you are getting a bit impatient. This call will not turn out well for you.
@donzelion – I don’t think theres really any exuberance over Intel, nor should there be. Just merely pointing out that if sentiment really were that bad among everyone regarding Intel that it would only take results that showed “the sky isn’t really falling” for some people to not shy away from owning Intel.
CreativeKev – CDMA phones are how popular outside the US? Or do you think the US market somehow represents a global future?
Dennisjr42 – do you think people are still buying Intel based on emotional hopes about surprising growth developments or similar events? Intel is a great value play, do you still think it has days of bubbly exuberance ahead?
Joel893 – the server market is what’s keeping Intel at its current valuations – already baked in, I think, unless there’s been massive growth lately at the sorts of folks running new data centers. Know any banks expanding their data centers these days?
Intel optimists are right to regard this as a long-term value play – and I expect we will all be rewarded. But I don’t see shares jumping 50% in the next 12-18 months, unlike most of battery of holds still in the Picks Portfolio.
Concur on all points.
“this steady march of chip generations will eventually wipe out all but the most deep-pocketed of competitors.”
Ah, the Japanese industrial model at work…worked for Microsoft, Apple (in their consumer wares), and many others – a decade of dominance, followed by a fundamental market shift. However, Intel is more akin to GE – not just a many major player, but the one major so dominant that it can go where it pleases within the key industry of its day. That makes Intel a natural for the Dividend Portfolio, but perhaps not for the 12-18 month Picks Portfolio.
>BTW – when will JUBAX be available at Fidelity?
fyi It’s been available at Fidelity for awhile now.
You sold Intelout of JUBAX also?
BTW – when will JUBAX be available at Fidelity?
Gotta agree with the Intel optimists.
Current assets minus total liabilities = about $3 per share cash. There is a huge margin of safety built in to the stock, with a 3% dividend.
On top of that, Intel is smart. They bought McAfee and Infineon for a reason.
There will be good rewards for patience with Intel.
Sounds strange to me… According to Yahoo, there are 30 analysts with Buy or Strong Buy ratings on INTC, and only 3 saying sell. If I thought INTC was as unloved as you say, then I’d buy even more. There may well be a sell-on-the-news downdraft when earnings are announced. And analysts can certainly be wrong. Things change fast in tech, and INTC has roughly $18B of net cash to pursue whatever market it likes – organically or through acquisitions. This kind of “underdog” seems like a good bet to me. Let’s see what INTC trades at in 18 months. I’m betting it will be quite a bit higher – and there’s a 3% dividend for consolation if I’m wrong.
Hope this works out like the last 3 sells – good gains shortly after the sell calls. I’m holding out for 10%, at least. 😉
It’s kind of – WOW!!!
Sure this days peoples behavior drive stocks a lot.
But, hey! To produce chips one needs not only ARM license, which Intel by the way also has. How about technologies, processes and factories? 28 nanometers anybody? Maybe Samsung, but they buy from Intel…. Maybe IBM, but they are in the same league.
Windows is not alone OS and it’s not leaving Intel at all. Nor any tablet will drive business. Tablets need cloud, storage services, network infostructure etc. At will take some time to move to new architectures and OSes, if even people will ever do it. But even then Intel will be at least a half of back bone.
Just look around! Do HP, ORACLE, Dell and others have ARM servers now? Are Google, Yahoo, Facebook going to throw out all their servers and IT personnel and start from scratch?
Everybody needs Intel in foreseeable future. And they will continue to beet expectations, because cloud need redundancy. 🙂 Less desktops maybe, but sure more servers.
And why do you think Intel got Infineon? I think something is baking internally.
I wouldn’t bet business on any kind of smartphone or tablet in their current form. These are not ready for enterprise now. It’s just hype for a present moment. May be in the future, may be.
And all these chip producers will compete in the same space, between each other.
Well, I don’t know what more to say. I’m new to investments and whats going on doesn’t make any sense to me. But, I have IT background. 😉 Tomorrow will show.
What about the server market? I thought that was what you were optimistic about.
So much for your prediction of $30.40 by December. Guess I’ll take a loss, because this time you’re probably right.
Wouldn’t this qualify as a case where there is so much bad news already baked into the share price that Intel won’t have to wow people for the share price to outperform?
Jim – I do think this is the right move. QCOM, BRCM, and others are where it’s at now and into the future. QCOM obviously will benefit from Verizon starting to sell CDMA iPhones. Think about it – the pent-up demand for a Verizon iPhone is enormous, and QCOM will get paid for every one of those sold.