Existential Problem Threatens Intel Stock Price

  • Intel has been said to have a mobile problem, or an OEM problem.
  • President Renee James left recently because she could not solve these problems.
  • Intel has a more existential problem in both designing and manufacturing microprocessors.
Intel Stock threatened by existential crisis

Since being named Intel (NASDAQ:INTC) CEO in May 2013, Brian Krzanich has seen Intel stock price rise by 40% but, as with China, the recent past has not been kind, with the Intel share price having fallen by 14% (See Chart 1) from their late May highs.

The two stories are related.

Intel Stock price movement May end to Jul 13
Chart 1: Intel shares have fallen by 14%

During the last decade Intel had a mobile problem. In this decade this has expanded into an OEM problem. Renee James was named President alongside Krzanich and sought to address the problem at the 2014 CompuTex show with a new PC design that split the keyboard from the screen, creating a tablet much like the Microsoft (NASDAQ:MSFT) Surface. There was great optimism that Intel had finally solved its problems, leading the Intel stock price to rise. Initial reports were cause for this optimism.

Turns out, not so much. PC sales are continuing to decline, and tablet sales have now surpassed them. Those Taiwanese OEMs are also continuing to lose share and sales.

So it was that James and her team resigned last week and Krzanich did a re-organization erasing them. This was foreshadowed by senior vice president Kirk Skaugen going to CompuTex in May instead of James, emphasizing things like the Internet of Things, and wearable technologies.

That’s not what the Taiwan OEMs want. What they want are designs they can make and easily sell, products with margins and markets. The business model of Intel has always been built around its OEMs but since the rise of clients like the iPhone from Apple (NASDAQ:AAPL) that business model has broken down. Apple has taken absolute control of its supply chain, using its own brand, making its OEMs more dependent on its corporate whims than ever before. Leading mainland China companies, most notably Xiaomi, have responded in kind, creating their own ecosystems that combine branding with supply chain control.

Intel’s customers are being squeezed out. This is hitting Intel where it hurts. Year-over-year sales are flat, at about $12.8 billion in the March quarter, and margins are cramped, with $1.93 billion in profits, 38 cents per share, a year ago and $1.99 billion or 41 cents a share in the most recent quarter. Intel is still covering its dividend, raised recently from 45 cents per share to 48, but most of its gains have been the result of buybacks, not organic growth. It is now very much a yield stock, not a growth stock.

Solving the OEM problem entails also solving a more basic problem. While the company is defined by Moore’s Law, the idea that chips can double their transistor count every year or two, it is now being whipsawed by Moore’s Second Law, which holds that the cost of setting up production scales with chip complexity. Foundries that cost $1 billion to outfit in 2012, in other words, cost $2 billion to outfit for the next upgrade cycle in 2014 and may cost $4 billion to outfit next year.

Most of the industry has responded by splitting in two. Most chip companies today, like Qualcomm (NASDAQ:QCOM), are design houses, software firms, which work with their customers to design new products and then ship the designs to foundries like Intel, Taiwan Semiconductor (NYSE:TSM), Samsung (OTC:SSNLF) or Global Foundries for production. There are now just four foundries, including Intel, making new microprocessors.

Intel is the only one of the four that continues to design its own mass-produced microprocessors, creating a “road map” defining its future for years ahead. This integrated approach of design-and-manufacturing looks increasingly obsolete. A break-up of Intel is looking, to me at least, all but inevitable.

But does Krazanich have the courage, the power, and the support to make that happen? Until he does, I can’t see Intel stock price going anywhere fast.

Dana Blankenhorn Dana Blankenhorn   on Amigobulls :

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