Intel has a very stable board and management. In its 45-year-long history it had only five CEOs.
The CEO is retiring at a very crucial juncture for Intel. Intel is facing severe uncertainties in its core market. Tablets and smartphones are replacing laptops and PCs. This is particularly problematic because Intel does not have a strong portfolio of products to cater to this market.
The new CEO will have to decide where he wants to take the company.
The Apple Risk
There have been rumors that Apple (AAPL) is planning to bring the chip business in-house.
Apple started using Intel’s chips in 2005 and as the line between laptops and tablets grows thinner, the technology used on them will become more similar. This is bad for Intel because the Apple tablets do not use Intel processors but ARM ones.
Given the pervasiveness of tablets and smartphones, their makers (Apple/Samsung) are becoming increasingly interested in the chip-making business. Samsung already makes its chips in-house.
Microsoft, which was Intel’s partner for a long time, has switched to ARM-based chips for Surface RT, its new tablet. In fairness, Surface pro still uses an Intel-based chip.
PCs represent 66% of Intel’s revenue. Apple shipped around 4.9 million Macs last quarter, which is a small fraction of the number of PC units sold (around 87 million). Even if Apple stops buying Intel chips, it will not be a serious loss.
Intel controls nearly 80% of the PC/laptop market. With its only worthy competitor, Advanced Micro Devices (AMD), in trouble, Intel is looking to capture more market share. Intel spent $10.8 billion on new plants and equipment last year. It is also building two fabs, each worth more than $5 billion. They are now concentrating on increasing the power efficiency of their chips and given their strong history in R&D, I will be very surprised if they are not successful.
Nineteen percent of Intel's revenue comes from its data center segment. Intel is stronger in this industry and does not face such a fierce and changing landscape. It also saw a 6% increase in revenue last year.
Intel is a very vertically integrated company. It designs, builds, markets and sells its products. Few can achieve such sweeping and encompassing scale. One of the reasons why Apple had to switch to Intel in 2005 was because Intel’s chips had become increasingly better compared to the PowerPC and IBM-designed chips which Apple was using. Apple had no other option than to use Intel if it wanted to remain competitive. It is yet to be seen if Intel can force Apple’s hand again.
I Am Buying Intel
And I suggest you look at the company seriously, too.
PCs are not going away anytime soon. It is not possible to do many useful tasks on tablets or smartphones. The PC market will not be a growth market but they will continue selling them.
At 4.3% dividend yield and selling for 10xFCF, Intel presents a very compelling valuation. I will continue to add as the stock price drops in the near term.
About the author:I started investing in December 2009
and my first stock CreditSuisse (CS) tanked to almost half its
value. This nudged me to start learning about investing from the ground
up. I am a long term value investor and am planning to generate sustainable amount of money from investment income by the time I am 40 years old i.e., 2025.