Saturday, January 17, 2015

Intel Beats Forecasts, But 2015 Poses Challenges

Intel (Nasdaq: INTC) announced earnings Thursday, beating guidance but offering an interesting, although somewhat neutral to bearish, view of 2015.  This is a period of significant transition for chip makers in general, and CEO Brian Krzanich painted an excellent picture of what will drive that market for good or ill in the coming year.

Over the past couple of years, there have been three primary markets in that arena: PCs, Tablets, and Phones.  To those broad categories, we can add Wearables, and a new term, "Phablets."  What's a phablet?  Think in terms of the Samsung Galaxy Note - a cross between a phone and a tablet.  So here we have the submarkets in which Intel and other chip manufacturers will compete in 2015. 

PC sales, at least according to Intel, are expected to be flat over the coming year.  That's not really surprising, but I'll be watching the forward guidance from Dell and HP for some confirmation on that front.  Certainly, the ultrabook and 2-in-1 laptop/tablet hybrid will push the PC market a bit, but the chip margins there are still somewhat prohibitive.  Both are expected to exploit Intel's Core-M chip, based on the 14-nanometer spec, but Intel is still suffering from the anticipated high start-up costs associated with that new technology.  The margins will improve through 2015, but you may not see that improvement until the second half of the year.  Still, it's a leader in the market, and Intel stands to benefit from it if demand for the laptop or tablet improves.

A large area of growth worldwide is in the cell phone space.  There is rapid product turnover, and the technology built into new phones is growing exponentially.  Here is where I think Intel's SoFIA technology will shine.  SoFIA takes a dual-core Atom Silvermont processor set into a 28nm system-on-chip (SoC) configuration, and integrates that with a 3G MODEM.  Now, in most of the US, 3G is a bit long-in-the-tooth, and consumers typically want 4G LTE technology on their new phones.  Intel is delivering that in the first half of 2015, and they already have a nice deal in hand with Samsung.  As this price-point drops, Intel stands to benefit tremendously.

I have some reservations about the phablet concept, though.  Bridging the gap between the footprint of a traditional smartphone and the footprint of a tablet, the phablet seeks to increase overall appeal to the consumer of both markets.  I'm not convinced.  Yes, I'm aware that Amazon stated last year that they see consumers asking for either a smaller tablet or a larger phone, but I struggle to see where something the size of a Samsung Galaxy Note can truly be practical in the phone space.  I may be proven wrong, but when I shopped for a phone last year, I chose the Galaxy S3 over the Galaxy S5 simply because the S3 had a smaller footprint and fit better on my belt.  I hear similar comments about phone footprint anytime a group of us tech-heads gather for lunch or dinner and compare our newest toys.  The large phone footprint is a problem, and I don't think it's a long-term survivor.  Whether it's short-term enough to drive Intel's profits in 2015 is outside of my comfort zone, so for me this one's a pass.

The wearable market is another area that leaves me a bit squeamish.  Yes, they are popular, and sales of wearables like the Fitbit have soared.  Unfortunately, the word "fad" keeps bouncing around in my head every time I see one.  At the end of the day, it's going to come down to how useful the consumer finds the data being provided by the wearable and so far I'm not reading much that's positive on that front.  Talk of the FDA regulating the apps that store and present that data also concerns me.

What it comes down to in 2015 was very nicely summarized by Krzanich: "We'll grow at the rate the market does."  He's right.  The question for us is whether or not Intel is a good fit for our portfolios today.  It's currently trading just over 17 times earnings, and it's also only 4% off its 52-week high.  Dividend yield is currently 2.5%, which isn't bad in today's low interest rate market, but once rates start to rise that yield is going to start to look very unattractive.  As much as I like this stock, I'm just not sure it has much room to run in the first half of the year.  I'll feel a bit more comfortable when I see its margins drop as they expect in 2Q15, and I'd really like to see what Samsung has to say about their vision for 2015 in the phone and tablet space.  The same is true for my interest in Amazon's forward guidance since they're the other major player in non-Apple tablets. 

Interestingly, a number of analysts raised their price targets for Intel following this earnings announcement, and that may give the stock a short term boost.  For a portfolio addition as opposed to a short-term trade, however, I'd like to see either a pullback in price or some indication for the end-buyers of Intel chips that there will be sustained growth to warrant a higher stock price.  I'll keep INTC on my short-term trading watch list, but for now, it's not a part of my longer term investment portfolio. 

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