Intel: Death by a Million Cuts
Oct 9th 2012 8:18PM
Updated Oct 9th 2012 8:30PM
It's been a rough day for technology as a whole, with big losses across the sector. However, one company stands out in a sea of red: Intel (NAS: INTC) . The chip giant was off 2.93% today amid a couple of bearish analyst notes. Today's plunge comes as Intel is 25% off 52-week highs thanks to its own cutting of guidance and a series of analyst downgrades.
Is Intel in trouble? Let's take a look.
A pair of bears
Two different calls from Wall Street spooked investors today. First up was Nomura Research, which reiterated a "reduce" rating on Intel and highlighted gross margins that could continue declining into mid-2013. On a similar note, Bernstein Research noted that Intel could see declining sales on its processors across the coming years and downgraded the stock to "underperform."
The two downgrades are essentially cut from the same cloth. Intel has seen gross margins expand from 51.9% in 2007 to 63.8% in the past 12 months. Part of this margin expansion has come thanks to its data center group. Intel's data center processors, the kind used in servers, have superior margins relative to its desktops. So with the data center group growing 57% between 2007 and 2011 while lower margin PC processor sales grew just 31%, you can see some natural margin expansion.
However, data center growth alone doesn't fully explain Intel's story. PC sales between 2008 and 2011 grew 17%, yet Intel's PC business grew 27% during that period. Market share shift between Intel and archrival Advanced Micro Devices (NYS: AMD) don't explain that gap. So clearly, some level of Intel's growth was driven by the average selling price (ASP) of each processor it sold.
Data center to the rescue?
In its note, Bernstein noted that growth in selling prices could reverse drastically this year, citing a 7%-10% selling price decline as Intel tries to prop up flagging PC sales. That concern over selling prices follows other semiconductor companies that have been downgraded thanks to pricing concerns. Just yesterday, mobile rival Qualcomm (NAS: QCOM) was downgraded itself on pricing and market share concerns.
Obviously, a loss on its ever-expanding margins would be a negative for Intel, and such a situation does look likely to happen. Yet there are some positives for the company for investors looking out over a long time frame.
For one, Intel is trading cheaply. It's currently valued at just north of 9 times earnings, a price that doesn't factor in much-if any-growth. Building on that, at the margin levels Intel sees on its servers, which is a space the company continues to hold a dominating market share over AMD in, a 50% increase in its data center to $15.7 billion a year in revenue would generate enough added operating profits to cancel out a 16% reduction in PC sales. Either that, or those added server sales could cancel out 6.2 percentage points of operating margin decline at a steady level of PC unit sales.
That's a mouthful, and by no means is data center growth at 8% to 10% assured in the coming years. However, that does demonstrate how the data center could "cushion" PC weakness in coming years. Add in the fact that Intel is at its most competitive position ever in smartphone processing and if situations ever got desperate could open up its fabrication facilities -- which have a huge lead on other chip manufacturers like Taiwan Semiconductor (NYS: TSM) -- and you see some long-term bright spots that margin concerns over the next few quarters might be missing.
In the end, I'm not yet in the "Intel is a buy" camp, but I'm teetering on the edge. PCs do look weak in coming years, but I also think Intel has some options that can soften the blow. Throw in a 4% yield, and the company is looking like a solid dividend tech player for investors' portfolios -- even if the future does look bleak today.
Guidance for the road ahead
Intel's name is synonymous with the semiconductor, but savvy investors like yourself should constantly question whether there is a profit opportunity left from the stock. Thankfully, Motley Fool analyst Andrew Tonner has assembled a special report detailing the opportunity, risks, and his Foolish bottom-line analysis on the company. Today, you can gain instant access to this report by simply clicking here now.
The article Intel: Death by a Million Cuts originally appeared on Fool.com.Eric Bleeker has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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