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GirlsUnder30 (96.51)

The intel on Intel

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January 06, 2014 – Comments (2) | RELATED TICKERS: INTC , AMAT , QCOM

Intel (INTC) is moving into the mobile space in a big way and judging by the history of their executions, they are likely to have a very competitive product but will they make money? In the following post, I will present my thoughts about Intel's profitability in the immediate future: I shouldn’t have to describe the Intel business to anyone reading this post, even the laymen know that anything computer related has a very good probability of having an Intel product or technology in it. They are the behemoth of the digital world and a dominant player in many of its sub-categories so what’s the problem?.  In a sense, they are a victim of their own success. Their processors were so far ahead of software development that many found no need to upgrade their equipment. I know many people happily chugging along with ten year old Intel computers so how does Intel make money? Well, the server and infrastructure businesses are the current cash cow but most consumers (or businesses) have no need for super computer power in a chip. In the current consumer market, price/performance is king and this explains the reason for the stagnant growth. Okay, so what is Intel doing? They have continued to invest in technology that advances performance and this means new fabs and equipment. This does not come cheap so we can expect a huge cash drain from the company going forward. Will it threaten the dividend? Probably not but it will definitely make it harder to pay it. The good thing about capex is that it is mostly recoverable through depreciation write off but huge depreciation expenses are only painless when there is operational income to offset it. When the money isn’t coming in, it hurts the income statements and this is why I think Intel will underperform the market until their mobile business gets going. Fortunately, their fabs have technology that will make it possible for Intel to produce the best power to performance ratio around which should make their products first rate but the question is whether the end consumer will be willing to pay a premium for this excellence. We may see the same ‘good enough’ attitude that has made the Chromebook and Kindle Fire viable alternative purchases. Intel will have a very tricky pricing path to follow for its upcoming products and I believe their current share price reflects their success has already happened. It is for this reason, I fear purchasing Intel above $20 until we get a clearer indication of how this will all pan out. With bad news, I can see a share price in the $16-17 range. I imagine this article will incite some but as Dennis Leary would say, “that’s my story and I’m sticking to it”

2 Comments – Post Your Own

#1) On February 01, 2014 at 5:34 PM, vai143 (< 20) wrote:

Awesome analysis.

But you have missed something. Even if I assume that home markets are stagnant, but there are other untapped huge markets. For example, emerging markets like India and other asian economies.

Now these are potential profits for intel. All they have to do is to tap. If they do it then there earning will go up in future and so is stock price.

If they don't then they will be trapped exactly you mentioned, without any doubt. 

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#2) On February 01, 2014 at 7:21 PM, GirlsUnder30 (96.51) wrote:

Thank you for your input. When I referenced the 'digital world' it included the emerging markets but it's good that you brought it to the forefront because there is much more price sensitivity there. If they price too low, their margins may not be sufficient to produce profits and if they price too high, they may lose market share. Neither of these scenarios are good when you are committed to a $12 billion capex.

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