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Intel, Intel, Undervalued Star

November 21, 2012 | About:
Chandan Dubey

Chandan Dubey

97 followers
CEO Is Retiring: Intel (INTC)’s CEO Paul Otellini will be resigning in May 2013. Otellini has served Intel in various positions since 1974. He was made COO in 2002 and CEO in 2005. Few will disagree that he has done quite a good job managing the tech behemoth and has overseen a near 40% increase in revenue since the time he took the reigns.

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.

Core Business

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.

Vertical Integration

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:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.3/5 (18 votes)

Comments

BEL-AIR
BEL-AIR - 1 year ago
I for one will not be turning in my 1tb laptop with a 17.3" screen & 8gb of ram for a smartphone or tablet anytime soon.

I have a smartphone but no way is it even close to replacing my latop. It is just a phone with a bigger screen and more memory, it does not come close to competing with my latop in almost any area.



How many of you on here are gonna turn in your laptop or desktop for Tablets and smartphones?


Have fun reading gurfocus on a tiny screen of a smart phone.

I been thinking about the pc industry for the last week, I think this pc weakness and crashing of pc stocks is a buying opportunity if you buy the good companies like MSFT, INTC etc, and stay away from HPQ for obvious reasons.

I still have not bought yet until I can get them at least 20% cheaper than they are now for added safety.

I think mr market will give it to me if I wait.

Every crash whether it be an industry crash or general correction had value plays and value traps, I believe at the right price INTC is a value play.

But you are always taking an extra risk when you invest in technology...

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