You Won't Have Intel to Kick Around

 | Jan 18, 2013 | 7:22 AM EST  | Comments
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No, I won't.

I refuse to feel sorry for a company that generated $6 billion in cash flow for the quarter, that spent $2.5 billion for new capital equipment to stay ahead of the game and still paid out $1 billion in dividends. I am not going to cry over a company that had $11 billion in net income and had gross margins of 63% for 2012.

That's right, I refuse to feel any remorse for Intel (INTC) and its inability to hit it out of the park any more without very strong gross domestic product growth worldwide and customers that are able to do better than ones who use the other guy's chips. And this time it isn't Advanced Micro (AMD), but ARM Holdings (ARM).

One could argue that you have to empathize with great American businessmen, premier manufacturers that simply can't grow fast any more, where low-single-digit revenue growth is becoming the norm and where you have to hope for a hockey-stick recovery in 2013 to get some real growth going.

Frankly, going into the quarter I expected more. Call me dated, but I thought the Windows refresh cycle would have more of a positive impact. Instead, Intel seemed to be hurt by the inventory clearance in older, Windows-7-based PCs. The burgeoning data center orders couldn't make up the difference.

Intel had also hung its hat on a huge ramp of the Ultrabook, but the tablet pretty much boxed that out. Plus, on the conference call Intel talked about the confluence of phablets (phone-tablet hybrids that are larger than smartphones, but smaller than plain old tablets) and how those are up-and-coming devices. Intel will have product for those markets and it lays claim to the mantle of offering the fastest and the lightest and the longest -- the usual superlatives -- with their new chips for that slice of the computing pie. In fact, it makes the point that Intel will have something for everything that is computing related that is competitive to anything anyone else has.

Good.

I just don't know if it will matter. I don't know if it will move the needle.

That's why, although I don't feel sorry for Intel, the subtext of the whole call felt a little Nixonian to me in the way that Intel is basically being reduced to a pitiful, helpless giant by the North Vietnamese, oops, by Arm Holdings.

In the end, forget the political implications of that statement. Intel, like the United States, is and will remain the strongest company in the industry. No one is going to touch its manufacturing prowess or its insight into how to build fabs, make them work and put out valuable chips for everything from the phablet to the data center.

It's just that all of that power and all of that miniaturization isn't driving sales the way it did. Microsoft's (MSFT) new software didn't make us throw away our personal computers. Intel is NOT the phone chip maker. It is a personal computer chip maker with chips for other businesses just like Microsoft is a personal computer software maker with software for other businesses.

And that's really the story, isn't it? The inventor of the chip for personal computers that blew away mainframes, midrange and minis just doesn't have the chips the big customers want for their smartphones and their tablets, or they haven't been able to win over those customers even though they are fabulous at what they do.

Come to think of it, I do feel bad for them. But that's not a reason that the stock should go higher. If I want that kind of low-single-digit growth with a possible strengthening second half, I can get it from any industrial company. Yes, it is true that Intel has a higher dividend than most of those companies and a better balance sheet, but then again, try as it might, it cannot convince me that it has more leverage to a better economy than literally half of the Dow Jones averages, including Procter & Gamble (PG), Verizon (VZ), AT&T (T) and Cisco (CSCO).

It is, alas, simply another stock, nothing special, just a good manufacturer levered to a part of the economy that has passed its prime without another part ready yet to take its place.

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