It's a lot harder to diversify away from personal computers than it is from cell phones.
That's my takeaway from last night's difficult Intel (INTC) call, where the company raised the speed of decline of its core market for personal computers from mid single digits to high single digits and indicated that it would have to lay off 12,000 people to right-size the company.
For a company with a fantastic balance sheet, a huge and still profitable personal computer business and the best semiconductor manufacturing capacity in the world, Intel still finds itself in a somewhat perilous state. Way too much of its business still comes from the quickly declining Client Computing Group, where it did $7 billion revenues. That's down 14% from the previous quarter on admittedly seasonal weakness, but also only up 2% year over year.
It's hard to wrench out more profitability from that $7 billion, but Intel's hell-bent on doing so because its Data Center Group's 9% growth to $4billon in revenues isn't going allow for the company to move like a growth company should.
That's the narrative for the layoffs, and I totally get that. It's the right thing to do. Intel has to push aggressively into the cloud, internet of things, automotive and mobile, and it has to do so quickly enough that it isn't whacked again when personal computer demand begins to decline by double digits.
The real issue, though, isn't, at least to me, the cost cuts. It's the acquisitions the company has done, namely the Altera deal last June, when Intel purchased the programmable logic solutions company for $16.7 billion. Intel's Bryan Krzanich was pretty jazzed by the $359 million in revs that brought in, but client computing by contrast just dwarfs it, with that $7.5 billion slug of revenues.
In other words, Altera didn't move the needle, at least this quarter, to diversify away from personal computers.
Now, contrast Intel with NXP Semiconductors (NXPI) and Avago, two companies that were almost entirely linked to Action Alerts PLUS portfolio name Apple (AAPL) at this time last year. Knowing that Apple's mobile phone business would have to slow, both companies, which were trading in lockstep with Apple, decided to make some pretty huge purchases to diversify from their big dog client.
NXPI shelled out $12 billion for Freescale, which then changed the company's profile from an Apple near-field communications technology company with an emphasis on smart-paying cell phones, to a company that's a dominant player in both cars and phones. Given that, as ARM Holdings said last night in its analyst presentation, the car is the new supercomputer, the deal's looking very smart.
But the acquisition has nothing on the $37 billion that Avago shelled out to buy Broadcom (AVGO), to make sure that it was known as a communications company not just a cell phone parts maker. I know that many thought it ludicrous that Avago would pay a huge premium in cash and stock, 16% higher than where the stock was, and it had already run a great deal. It was the biggest tech deal of all time and it took Avago from being known as a parts supplier to Apple to being a semiconductor company that may be dominant in all sorts of communications, hence why it was even willing to lose its pre-nup name and adopt the name of its smaller newly-wedded partner.
To me, the grade here is simply one of market cap and stock performance. When Avago made the bid for Broadcom, its stock was at $130. It's now at $151 after just trading up to $160. No wonder Hock Tan, the hard-charging CEO of then Avago, said he was "paranoid" that someone else would come in to pay more for Broadcom. It's clearly been worth it.
NXPI? It's at the exact same price for when it announced the Freescale bid, in part because its core near field business has slowed versus very high expectations.
Intel's stock, however, was at $34 when it announced its bid for Altera, ostensibly to boost its data center business, but also to build out its relatively small communications chips business.
Today it stands at $30. Was Altera a needle mover? Not yet, or at least not yet when personal computers are so soft, secularly soft.
Which gets me wondering. One of Intel's late founders, Andy Grove, wrote a fabulous business book, Only the Paranoid Survive. It made me wonder about Hock Tan's choice of the word "paranoid" when he described his so-called overbid for Broadcom. Maybe he was paranoid about Intel buying Broadcom. Hmm, in retrospect, maybe they should have.