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The Curious Case Of Intel
Tech giant Intel (Nasdaq:INTC) is a mess of contradictions. It is a tech bellwether, but one with unimpressive growth over the past decade. It is a pioneer in the microprocessor sector, but questions swirl about its ongoing relevance even as it posts an all-time best quarter. Worse still, it is a story that does not lend itself to sound bites and simplification.
The Quarter That Was
By any reasonable standard, this was a great quarter for Intel. Revenue jumped 34% from last year and rose 5% sequentially to an all-time best of $10.8 billion. This growth was fueled by strong demand for PC and server chips, as PC-related revenue climbed 31% from the year-ago level.
Margins were solid, as gross margins improved by about 390 basis points from the first quarter. On both the top and bottom lines, the company handily surpassed the average analyst estimates for the quarter.
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The Look Ahead
A nice quarter is all well and good, but we know that what investors really obsess about these days is the forward guidance. To that end, Intel delivered rather rosy predictions for the next quarter and overall guidance for the full year went up as well. What is interesting, though, is that the company also reported that distributor inventories are pretty lean entering the quarter - a piece of news that some may interpret as a cautious sign for the second half of the year.
It will be interesting to see, then, what Advanced Micro (NYSE:AMD) has to say about its quarter and outlook when it reports later this week. More than a few analysts are looking for a second half slowdown and AMD's commentary may help resolve that "good growth / low forward orders" conundrum.
The Longer View
Intel looks cheap by a lot of conventional measures, but there are some very definite clouds on the horizon. The PC market has changed significantly in only a few years' time (the rise of the laptop at the expense of the desktop) and there is certainly a school of thought that predicts smartphones and other related devices will further supplant laptops. The question, then, is whether Intel can adapt to this change.
As of now, Intel is not a force in smartphones. Leading platforms like Apple's (Nasdaq:AAPL) iPhone, Motorola's (NYSE:MOT) Droid, HTC's Evo and Palm's (Nasdaq:PALM) Pre all use processing chips based upon architecture licensed from ARM Holdings (Nasdaq:ARMH). Worse still, the only major partnership I know between Intel and a smartphone maker is with Nokia (NYSE:NOK), another former leader that seems more and more irrelevant in the market. As a result, until Intel can show some real momentum with itsMoorestown platform, there are going to be questions about whether Intel is on the wrong side of the window with the fastest-growing consumer electronics market. (For more, see Look To Semiconductors For Earnings Growth.)
The Bottom Line
Even though there are some valid questions about how and where Intel can drive consistent growth, investors should not ignore the fact that Intel's annual R&D spending is larger thanNicaragua
All in all, I think a worst-case scenario for Intel (token top-line growth and no improvement in cash flow yield) yields a price target only 50 cents lower than where Intel's stock closed before the earnings announcement. That is a pretty solid down-side cushion for the value and growth-at-a-reasonable-price crowd.
Investors need to accept that Intel will probably never get the credit it deserves and the stock will be volatile, but Intel's stock strikes me as a proposition where the risk is low and the possible rewards are pretty attractive. (For more, see The Characteristics Of A Successful Company.)
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The Quarter That Was
By any reasonable standard, this was a great quarter for Intel. Revenue jumped 34% from last year and rose 5% sequentially to an all-time best of $10.8 billion. This growth was fueled by strong demand for PC and server chips, as PC-related revenue climbed 31% from the year-ago level.
Margins were solid, as gross margins improved by about 390 basis points from the first quarter. On both the top and bottom lines, the company handily surpassed the average analyst estimates for the quarter.
IN PICTURES: 10 Options Strategies To Know
The Look Ahead
A nice quarter is all well and good, but we know that what investors really obsess about these days is the forward guidance. To that end, Intel delivered rather rosy predictions for the next quarter and overall guidance for the full year went up as well. What is interesting, though, is that the company also reported that distributor inventories are pretty lean entering the quarter - a piece of news that some may interpret as a cautious sign for the second half of the year.
It will be interesting to see, then, what Advanced Micro (NYSE:AMD) has to say about its quarter and outlook when it reports later this week. More than a few analysts are looking for a second half slowdown and AMD's commentary may help resolve that "good growth / low forward orders" conundrum.
Intel looks cheap by a lot of conventional measures, but there are some very definite clouds on the horizon. The PC market has changed significantly in only a few years' time (the rise of the laptop at the expense of the desktop) and there is certainly a school of thought that predicts smartphones and other related devices will further supplant laptops. The question, then, is whether Intel can adapt to this change.
As of now, Intel is not a force in smartphones. Leading platforms like Apple's (Nasdaq:AAPL) iPhone, Motorola's (NYSE:MOT) Droid, HTC's Evo and Palm's (Nasdaq:PALM) Pre all use processing chips based upon architecture licensed from ARM Holdings (Nasdaq:ARMH). Worse still, the only major partnership I know between Intel and a smartphone maker is with Nokia (NYSE:NOK), another former leader that seems more and more irrelevant in the market. As a result, until Intel can show some real momentum with its
The Bottom Line
Even though there are some valid questions about how and where Intel can drive consistent growth, investors should not ignore the fact that Intel's annual R&D spending is larger than
All in all, I think a worst-case scenario for Intel (token top-line growth and no improvement in cash flow yield) yields a price target only 50 cents lower than where Intel's stock closed before the earnings announcement. That is a pretty solid down-side cushion for the value and growth-at-a-reasonable-price crowd.
Investors need to accept that Intel will probably never get the credit it deserves and the stock will be volatile, but Intel's stock strikes me as a proposition where the risk is low and the possible rewards are pretty attractive. (For more, see The Characteristics Of A Successful Company.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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