New Catalyst for INTC Stock
Intel Corporation (NASDAQ:INTC) has spent the last two years caught in the midst of an industry-wide slump. However, INTC stock hasn’t fallen as far as some of the other semi-conductor stocks.
The company’s scale saved it from further damage. Smaller firms were hit much harder by the industry slowdown, mostly because the market wasn’t willing to give them the benefit of the doubt.
But let’s back up for a second. What exactly caused this mysterious setback to the semi-conductor industry?
Well, there are really two factors at play.
The first is a little technical, but it’s incredibly important to understand. Semi-conductor companies make microchips that go into all sorts of electronics. The microchips that power desktop computers and laptops have transistors on them and the more transistors they have, the faster the computer’s speed.
Simply put, transistors = speed.
There was a general rule in the industry known as “Moore’s Law” that said the number of transistors able to fit on a microchip would double every two years. Think about it: scientists and engineers were able to find ways to make those transistors smaller and smaller. Doubling them every other year also effectively doubled computing speeds. That’s why your computer is so much faster today than ones made 10 or 12 years ago.
But “Moore’s Law” is at an end. It is becoming impossible to fit more transistors onto a chip, so there is simply no growth left in microchips for desktops and laptops.
That’s the first tailwind for companies like Intel.
There’s also a much simpler explanation for the industry-wide blues. Computer sales are slowing down, yet there are a whole bunch of semi-conductor companies left over from the boom times. In other words, there’s too much supply for too little demand.
Prices have fallen as volume has shrunk, which is a death knell for any company without the ability to switch gears.
A permanent slowdown in computer sales is the second reason Intel stock is down.
Luckily for Intel, though, it is the biggest kid in this particular playground. It gets to swing its weight about until there are fewer players in field, which has already started to happen. Last year brought with it a record amount of mergers in the semi-conductor industry. Consolidation means only a handful of key microchip makers will survive. Intel will almost certainly be one of them.
But that alone won’t keep INTC stock growing. Something bigger is needed to ignite a growth run in the stock and I think we just got a glimpse of what that catalyst could be.
Intel is reportedly considering the sale of its cyber–security unit. The company has been meeting with several high-profile bankers to discuss options, which means this isn’t a pie-in-the-sky proposal. Intel is genuinely thinking about spinning off, or selling, Intel Security (previously known as “McAfee”).
Not to sound dramatic, but this could be the tipping point INTC stockholders have been waiting for.
First off, Intel would be looking to sell McAfee at a steep profit. Intel is hoping the division will fetch a sale price of $7.7 billion, an excellent price that would pad Intel’s income statement come earnings season. (Source: “Intel weighs sale of cyber security business,” Financial Times, June 26, 2016.)
More importantly, the sale signals a giant shift in Intel’s business.
Microchips for computers have been the company’s bread and butter for decades, but it has pivoted in recent months. Intel is now gunning for the cloud computing industry. However, rather than compete with the likes Amazon.com, Inc. or Alphabet Inc, it aims to supply them with the infrastructure needed to build data centers.
Unlike desktop and laptop sales, cloud computing is a fast growing business with nearly unlimited potential. Becoming the supplier of choice for cloud computing providers could mean massive contracts, surging profits, and unbelievable gains for INTC stock.
This isn’t one of those slick PR attempts to rebrand a company. Intel has laid off 12,000 workers related to its personal computers division just so it can free up the necessary resources. Those are deep cuts that aren’t taken lightly.
The company obviously sees the end of “Moore’s Law” and wants to plan for the future. Shifting its focus to the cloud makes perfect sense—it could be a long-term driver for the stock. In the short term, however, the sale of McAfee is what I see lifting INTC stock.