Chipmaker Has Lost Its Flavor

 | Apr 16, 2013 | 11:00 AM EDT
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Does anybody follow Intel (INTC) anymore? In the 90s, I followed Intel's management around the country like a dog with a bone. I went to every investment conference, every product announcement and listened to every conference call. With a one-year return of -25% and a five-year return of -5%, you can excuse me for not jumping on a plane the next time the company speaks. Nowadays, I can't bring myself to get out of bed if Intel is planning a presentation.

Intel is getting hit from all sides. PC unit growth suffered its steepest decline in history last quarter, dropping 14% worldwide, according to research firm IDC. Gartner reported something similar, saying PC sales had their worst decline since the second quarter of 2009.

While people were quick to blame Microsoft's (MSFT) new operating system Windows 8, I think it has more to do with the fact that desktop users no longer have to upgrade as frequently as they did in the past. Intel's x86 architecture is more than 30 years old now and has reached the point of diminishing returns. Intel is forced to compete with lower cost processors from ARM Holdings (ARMH) and Advanced Micro Devices (AMD). The days of raking in high profits from desktop processors are over. Estimates have Intel making  just $49 in profit on each desktop processor, down from well over $200 back in its heyday.

Notebook profits are under pressure, too. The company made an estimated $63 profit on its notebook processors but that market has been hurt as consumers shift their attention to mobile devices.

Intel also missed the shift to mobile. According to the company's own research, Intel has just 0.2% market share in mobile. And, if that wasn't enough, Intel's strength -- servers and datacenters -- are under attack from software virtualization and inexpensive knockoffs. While the demand for cloud computing is increasing, datacenters are shifting their purchases to low-cost hardware and bypassing Intel's expensive brand name. Many cloud providers are avoiding "vanity computing" as they have found that inexpensive knockoffs from AMD are good enough to run their cloud infrastructure.

It all adds up to an uncertain time for Intel. In fact, fiscal 2013 revenue is expected to increase just 0.53%, year-over-year. Wall Street is more positive on the company's outlook for2014, projecting revenue growth of 4.5% growth and 4% for 2015. However, Intel's glory days of 20% revenue growth with 65% gross margins appear to be long over.

When demand didn't materialize last year, Intel brought down its fab utilization to 50%, allowing inventories to come down. As inventories get back to normal, fab utilization will likely bounce back in the second half of the year. Gross margins should rebound from 57% to 60%, but I'm not sure that will be enough to bring the excitement back.

The company is planning several new products and product refreshes. Look for a new Atom processor code named Bay Trail and another chip named Haswell. While Intel bulls are hopeful these products will stem the tide, I'm not so sure. There is a lot to fix. It certainly doesn't help that CEO Paul Otellini is about to retire next month and Intel hasn't named a successor yet.

While I have no doubt Intel's first-quarter revenue estimate of $12.587 billion and earnings per share (EPS) estimate of $0.40 is somewhat conservative, I can't bring myself to recommend the stock. For the adventurous, Intel is only trading at 11x the consensus year-end estimate $1.90 per share. But for the life of me, I can't bring myself to buy Intel.



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