Intel (INTC) has traded in-line with the S&P 500 over the past 10 years, and if it weren't for the dividend, investors wouldn't have made any money on the stock at all. I'm afraid 2016 doesn't look much different, and I continue to recommend avoiding the chip giant's shares.
I was very pessimistic about Intel when I last wrote about the firm in April, and the stock has just churned around like butter since then. INTC guided analysts downward on Thursday even as the company beat consensus estimates for its fourth-quarter and overall 2015 earnings.
Intel reported earning $0.73 per share in the quarter, beating consensus estimates by $0.11. Revenues rose 1.3% to $14.9 billion -- in line with estimates -- but gross margins ended at 64.3%, 200 basis points better and expectations.
However, most of the earnings beat came from a lower-than-expected tax rate. Intel paid just a 16% effective tax rate during the fourth quarter due to renewal of the U.S. research-and-development tax credit.
And while the overall quarterly results came in basically in-line with expectations, investors mostly focused on the company's weak forward guidance. Management said the first quarter would come in at "the low end of seasonality," which in Intel-speak means down 8% to 9%. (Since the first quarter contains one extra week this year vs. last year, some investors thought the low end would be even lower.)
Intel also mentioned that its PC business is seeing weakness in China, which really spooked investors because China has been a bright spot for the firm.
The company also said revenue at its data-center group grew just 5% in the fourth quarter compared to 12% in the third period. I consider that a huge negative surprise, as many investors expect cloud computing to drive Intel's future growth. But right now, it looks like first-quarter data-center revenue will be down about 3.5% to $4.1 billion.
With a slow first quarter, this segment's revenue will likely end 2016 at around +11%. That's hardly the "growth business" that some INTC investors have been banking on.
Intel also guided revenues at recently acquired Altera to $400 million, or about $25 million less than expected. If that trend holds, Altera will be lucky to have a flat year. Again, that's not exactly what investors are looking for.
The other thing that bothers me about Intel's news is the revelation that the company will be "adjusting" its depreciation schedule. By monkeying around with depreciation, INTC can boost non-GAAP earnings per share by as much as $0.20. That's an 8% increase.
But for Intel stock to stop declining, I think the company needs to see stabilization in its Client Computing Group (as INTC calls its personal-computer business). CCG accounts for 60% of Intel's revenue, but management's guidance pointed to an ugly 12%-13% decline for the segment during 2016's first quarter.
Oveeall, I think the company somehow has to rebound from what looks like an unusually weak first quarter and reach a 6% revenue-growth rate for 2016 as a whole. But even if the firm does get there, Intel's operating margins have been wrecked. The company enjoyed a 27.5% operating margin as recently as 2014, but will be lucky to log a 23.5% one this year.
That means 2016's third quarter had better be unusually strong, because we know that Intel's first quarter will be a mess and its second and fourth quarters are usually nothing to write home about.
I get it that INTC bulls think the stock has hit a trough, meaning that any improvement over last year's results would get the share price moving higher. But a lot of things have to go right for Intel's price to really be at a bottom, and it doesn't seem like the company is starting off 2016 on a good foot.
The bottom line: I would avoid Intel until it becomes clear that the company's PC business has stabilized. Until then, buying this stock just does not compute for me.