Time to Ditch Intel Stock? Hardly
Intel Corporation (NASDAQ:INTC) is the 800-pound gorilla of the semi-conductor industry.
It is a dominant supplier of microchips that power laptops and computers. Betting on INTC stock has always been a bet on the continual rise of computer sales— until recently.
Computer sales have been slowing down in the past few years and to be honest, that’s not going to change. Processing speeds are hitting a brick wall, not to mention customers can’t afford to upgrade as often as they used to.
That’s the downside of having computers, laptops, tablets, and smartphones. It’s simply too expensive for most people to keep buying the latest versions. That’s just how it goes.
The main idea to understand is that Intel’s core business isn’t growing anymore. That’s why the company is laying off 12,000 workers and it’s also why it is pushing into a new business line. New growth has to be found or else INTC stock’s price could fall.
Luckily, Intel has the resources to do almost anything it chooses. From what I’ve been able to tell, the company is breaking into several new industries. This double threat could catapult INTC stock to new heights.
The first major shift is that Intel is getting into the mobile game.
Apple’s new “iPhone” will actually feature a modem chip from Intel, which is a huge win for the company. Until now, Apple’s modems were supplied by QUALCOMM, Inc.
This is a brilliant move by Apple. It is effectively pitting suppliers against each other in the hopes that Qualcomm and Intel will keep bidding down the price of their microchips. Either way, Apple comes out on top. (Source: “Intel Gets Chip Order From Apple, Its First Major Mobile Win,” Bloomberg, June 10, 2016.)
I would argue that Intel also wins with this deal. After all, its mobile segment was a loser until now. This new contract could turn that around. Moreover, this deal could earn Intel new contracts with other smartphone manufacturers. It could be the first in a long line of dominoes.
The new contracts don’t have to translate into profits overnight. As long as the market sees a roadmap to profits, it will keep the stock moving up. Intel should focus on landing more mobile contracts to keep its top-line figures going up and to the right.
The second major shift is toward data centers.
Think about it: data centers, or servers, have always been inconvenient for businesses to own and operate by themselves. Businesses have to find space for the servers, employ technicians, and maintain a cooling system.
The Internet changed all that. Companies like Amazon.com, Inc. and salesforce.com, inc. pioneered an industry where they build massive data centers to form a “cloud” that customers can use for storage and other services.
These companies can harvest an enormous amount of data on the cloud and have it crunch those numbers into useful insights about the people they sell to. Better still, the cost to businesses is much less than it would be to host their own data centers. It’s a no-brainer.
Cloud computing as a service has been a complete game-changer, not to mention a cash cow. Amazon turned profitable solely on the strength of cloud computing, proving how lucrative this business can be. The margins are high and the business is growing.
Intel is uniquely placed to succeed because it can piggyback on the success of cloud computing. The company provides basic infrastructure that makes it all possible.
Intel is already selling to Amazon and Google, two of the biggest players in the data center race. It has given Intel an early lead in the market, but competitors like Broadcom Ltd and NVIDIA Corporation are hot on Intel’s trail.
If Intel wants to maintain a dominant position in the industry, lower margins might have to be tolerated for a while. Luckily, the company can afford to do that because it cut 12,000 jobs. (Source: “Intel’s Data Center Guru Talks About Layoffs and the Cloud,” Fortune, June 14, 2016.)
While it’s terrible that so many people lost their jobs, the decision was undeniably clever. Intel couldn’t survive a price war without substantial cuts to its bloated workforce, most of which was part of a PC-first strategy. And Intel’s PC-first days are over.
I’m impressed at how proactive the company has been in changing its direction. It shows that it has learned from its past mistakes. Intel was famously late to the smartphone industry, and it cost the company dearly. It won’t let that happen again.