- Intel may beat Q3 earnings estimates on 18 October, but that doesn't matter in the larger scheme of things.
- The long term narrative isn't very compelling, and pressure is mounting on Intel's main revenue segments.
- For now, Intel stock is best suited for income investors who are happy with a ~2.8% dividend yield.
Intel (NSDQ:INTC) recently hiked its Q3 guidance, and that's lead to some excitement going into this earnings season. But there's not much to be excited about for long term investors. At the moment, Intel is fraught with both risks and opportunities. While the risks could materialize sooner, the opportunities could take longer to translate into tangible gains for investors. Irrespective of Intel's Q3 performance, unless the company makes some unexpected positive announcements, Intel stock seems best suited for income investors who are happy with a ~2.8% dividend yield. Here's why.
What's The Problem? 3 Key Risks
It's a rather well know fact that Intel is heavily dependent on PC sales. And while Intel dominates that space, the market itself is on the wane. PC shipments are declining consistently, and earlier this month, industry research firm IDC reported a 4% drop in global PC shipments. So, Intel's revised guidance, backed by better than expected PC demand isn't something that should excite long term investors. To rephrase, better than expected PC demand basically means that demand hasn't dropped off as badly as expected. This market is expected to shrink every year going forward, and it isn't something you want to bet on. That's why Intel's Data Center Group is of great importance.
Google, IBM And 7 Others Team Up To Dent Intel's Data Center Group
Intel's Data Center Group, which contributes ~30% of the company's revenue carries the weight of expectations, given that the other segments are still relatively very small. And a recent report by Bloomberg suggests that competition is going to intensify here, with Alphabet (NSDQ:GOOGL), International Business Machines (NYSE:IBM), Micron (NSDQ:MU), AMD (NSDQ:AMD) and NVIDIA (NSDQ:NVDA) among others, joining hands to take on Intel. The said companies have joined forces to launch an "open specification that can boost datacenter server performance by up to ten times, to take on Intel Corp." The report also states that "The consortium plans to make the OpenCAPI specification available to the public before the end of the year and expects servers and related products based on the new standard in the second half of 2017". The impact on Intel remains to be seen, but given the state of affairs, this is definitely something it could do without.
Longer Node Shrink Cycles
Earlier this year, Intel announced a change in its chip development cycle. Intel will now use the same process node for three years and develop three processors under each node, instead of two, as it currently does. And while Intel's 10 nm is expected next year, it has reportedly delayed the launch of its 7 nm chips to 2022, something it was earlier expected to do by 2020. Intel's ability to invest in chip fabrication technology and introduce node shrinks earlier than its peers has given the company the lead it enjoys. Intel's strategy to pull back on node shrinks could backfire, allowing competitors to inch closer.
Will Apple Replace Intel With ARM On Macbooks?
Rumors are already doing the rounds that Apple could replace Intel's chips with custom ARM chips on Macbooks. This isn't as simple as it sounds, and there are risks, as fellow author Piyush Arora noted in this post here. That said, reports suggest that the benefits of such a shift could be on-par performance, if not better, and huge cost savings for Apple. The same report quoted earlier opines that:
"ARM-derived SoC (System on a Chip) designs are known to triumph over Intel's x86 devices due to their low manufacturing cost, better power dissipation and easier integration across cross-platform hardware like desktops and portables."
Nobody wants to lose business, least of all, from Apple (NSDQ:AAPL). Now that we've looked at the risks, let's quickly look at the some of the promising opportunities Intel has lined up.
On The Brighter Side
It's a known fact that Intel hasn't managed to gain much ground in the mobile devices market. But it has reportedly managed to find its way into Apple's iPhone 7, with its mobile cellular platform though, not the processor. In that context, Intel recently struck a deal with ARM to manufacture processors with ARM's off-the-shelf designs. The move will give customers of Intel's foundry business, access to chips with ARM's mobile architecture, which more or less owns the market. Given that Intel really hasn't managed much in this space, the move is not a bad one. Like David Meyer said in his post on Fortune.com, "That’s one way to do mobile."
Then there's Intel's clearly outlined intent to dominate the 5G race. Intel plans to begin trials as early as 2018, with the aim of large-scale deployment by 2020. But as we'd highlighted in a recent post on the topic, Qualcomm (NSDQ:QCOM) has some advantages in this race, and Intel's intent is by no means a guarantee that the prospects will translate to tangible gains. The other area where nearly every chipmaker wants to be is in the autonomous cars space. And while NVIDIA currently dominates this space, Intel has teamed up with BMW and Mobileye (NYSE:MBLY) in the race to commercialize self driving cars. Again, there are tons of players who are trying to conquer this space, and intent is not a qualification in itself.
Also Read: Chip Delays Will Hurt Intel Stock
Summing It Up
Intel stock valuations aren't expensive compared to the industry average. Currently, the stock yields nearly 2.8% (dividend yield). Intel is known to hike its dividend payout in November each year, and it's expected to hike dividends this year as well. Intel is a solid company financially, and that sort of a dividend yield isn't bad at all. Given Intel's heavy dependence on PC sales, the growing competition in the data center's space, and the other risks outlined in this post, it doesn't matter whether Intel beats estimates or not on 18 October.
Beyond a potential short term rally in the event of a surprise, the long term story doesn't look exciting as things stand. But given Intel's strong balance sheet, Intel stock is best suited for income investors who are happy with a ~2.8% dividend yield.
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