Is Intel A Good Buy?
Founded in 1968, Intel Corporation (INTC) has grown into a 104 billion dollar company that today dominates the global semi-conductor industry, providing processors for the PC and server market. It is only second to Korea’s Samsung Electronics, with a market cap of 118 billion.
Intel derives approximately 90 per cent of its revenues from the PC market. Over the years it has dominated and trampled its main competitor Advanced Micro Devices (AMD), and left other chip producers such as Texas Instruments (TXN) far behind. It also has a generous dividend yield of 4.30%, a debt to equity ratio of 0.40, a low PE ratio of 9.01, and a low dividend payout ratio of 38.5%. Intel currently has revenue of 48.44 billion (trailing twelve months), with a quarterly revenue growth of 21%. The balance sheet is certainly solid, and with the price at USD $19.64, off -17.7% from May highs, Intel is looking to be an attractive buy.
Missing the Mobile Wave
What Intel does best is produce high performing chips for PC’s and servers, which require speed and power. However mobile processors built for cell-phones or tablets do not use Intel processors (namely Intel’s Atom processor) since Intel chips are heavy on power and run at high temperature. Mobile devices including Apple’s ipads, tablets, and most cell phones run on the ARM (LSE: ARM.L) based processors, largely produced by Samsung. These chips generate less heat and require less power.
Samsung continues to be the leading provider for ARM based processors in the tablet and mobile market. However relations between Samsung and Apple are less than stellar. Back in May, Apple had been rumoured to be making plans with Taiwan Semiconductor Manufacturing Co. to produce the company’s A5 chips. Then there is Google’s recent acquisition of Motorola, which also produces chips and phones to a lesser degree, mainly for Google’s Android phones.
Intel has so far missed the boat on the mobile wave, and continues to produce the high-powered chips for PC’s and servers. While there will always be a demand for Intel’s products and the PC and server market will always remain, the tides of change are already apparent. For example, Hewlett Packard (HP) stunned markets in mid August, when they announced they may abandon their PC business, in a move away from the consumer market. Intel supplies chips to HP.
Should You Invest?
Currently Intel provides an excellent investment opportunity from both a price point and with its fundamentals, as well as a generous dividend. If you are buying Intel as a long term investment, then you need to ask yourself two questions. First, is Intel’s economic-moat in the PC and server markets, enough to sustain its strong revenue and growth? Second, is Intel’s absence in the mobile device marketplace a factor to its future? It really depends on whether the PC and server markets, the core of Intel’s revenue will continue in the years to come. In the future, a lot may ride on whether Intel can move into the mobile market, expand into other markets, or collaborate with Apple. With the constant tides of change in the technology sector, buying Intel isn’t as clear cut as one might expect.
Intel still has an edge when it comes to microprocessors. The key is how well they manage this moat.
Very interesting company to watch!
I would also add the new wholly owned subsidy on Intel, Intel Federal, LLC. This new subsidy will, “to provide strategic focus in order to better address new opportunities in working with the U.S. government.”
Basically, they will be working on supercomputers with the US government. Could this be a new, and more lucrative move than the highly competitive and ever changing mobile market? It just may be – I don’t know, but I would guess supercomputers have a longer shelf life than a mobile phone…
Great article.
I look at it as a value play. You can view the lack of business in the mobile market another way: opportunity. You can buy Intel as-is now…a pretty phenomenal company with just the PC/server markets with an opportunity to expand into the mobile markets. It’s at a great price with a very strong yield. If they do manage to expand into the mobile markets with new low consumption chips then it could be lights out.
Either way, I wouldn’t make INTC a large part of my portfolio. I’m naturally tech-averse when it comes to investing so I’ll likely make INTC my only tech play.
Thanks for the article Ninja!
MoneyCone, Pig, and Mantra,
Thanx for posting guys! Intel really is an interesting company, and as Pig alludes to, there is certainly some other areas they are developing technology in. Though 90% of their current market is in PC chips. Other rumours are that they may produce A5 chips and the new Apple chips, since the legal fiasco between Apple and Samsung.
So much is up in the air with this industry, and tech companies are under enourmous pressure to innovate. Change is the constant in this industry. I’m really interested to see where Intel goes over the next few months, it is rich in cash, higher yield and has a solid base behind it. It may indeed be a good value play – time will tell ;) At least you get paid a healthy yield to wait..
Cheers
The Dividend Ninja
Nice post.
To answer your question, I wouldn’t buy this company as a long-term investment. I just don’t see how technology will slow down, if anything, it will accelerate and I don’t think I have the mindset to keep up with it as an investor. That’s probably just me though.
This sector is not as safe as energy or others, just my opinion.
I liked your closing thesis: “In the future, a lot may ride on whether Intel can move into the mobile market, expand into other markets, or collaborate with Apple.” The future is data and services on-demand on/with people. Intel simply isn’t in that space yet and maybe they should be?
Again, really great stuff DN.
MOA thanks for posting! Yes your right, the technology sector is changing at lightning speed. Five years ago you could list 5 tech companies and what they do, today the changes in the industry are by the month! I think Intel will be well positioned, but it may not be the stellar performer it once was.
Intel has a pretty strong moat with their process technology, having production chips that are 1 to 2 years ahead of their competitors (Samsung, TSMC, Global Foundries). Intel delivered their gate last, metal gate 45 nm and 32 nm product well ahead of AMD and Global were able to deliver their gate first, metal gate processes.
Intel’s absence from mobile may have more to do with execution on the Atom design or lack of focus on the product sector. The ARM core is built with a lower performance (speed) semiconductor process than what Intel can deliver. So in my mind, Intel could easily enter the mobile applications market if it chose to.
The reverse cannot be said of its competitors: Samsang, AMD, Freescale would have a tough time competing in Intel’s processor market. And given that Intel’s R&D budget has often been greater than AMD’s revenue, I would suggest that the semiconductor process technology gap will get larger over time. So Intel’s technology lead should expand.
The cost of building an advanced CMOS process foundry is in the range of several billions of dollars. This requires ever more chips to be produced to recover the capex, and fewer and fewer companies have a production run to pay for a foundry. So even TI exited from the foundry business after the 65 nm node.
So for CMOS process, there will be Intel, then Samsung and TSMC; and the rest falling further behind each year.
Intel looks like a buy to me.
Kevin, thanx for dropping by and commenting!
Sure Intel could turn around tommorrow and retool it’s facilites for lower powerd chips and enter the mobile market, but it hasn’t, and its attempt at the Atom processor didn’t work. There aren’t any buyers for Intel in the mobile market, since Samsung and Apple dominate globally. Apple seems to be more interested in usupring other chip companies, than contracting out to Intel or continuing business with Samsung. But that could always change. That’s about the only constant in this industry!
Yes Intel is ahead of Samsung in the PC market, but don’t underestimate Samsung’s power, they area a massive conglomerate that have the Korean government behind them. It wouldn’t be much of a skip for them to shift from Apple A5 chips to PC’s at all. Also the PC market is shrinking… while the mobile and tablet market is growing massively. Intel has indeed missed that boat.
Yes Intel is a buy at these price levels, and may turn out to be a stellar performer. But the technology sector is slowly shifting away from PC’s, and I think that is the one point you have to consider for the long term. But hey, who really knows?
Cheers
The Dividend Ninja
I like Intel and I think it’s a buy IMO. The company has a large market cap, pays a generous dividend (has been steadily increasing since at least 1992), has solid earnings and a great balance sheet.
Earlier this summer I purchased shares in MSFT; as a Canadian investor, I think INTC offers me the opportunity to diversify into the technology sector and get more exposure. It’s not something I can invest in just yet, but I’m keeping my eye on it.
Great post Ninja :)