The key markets for many semiconductor manufacturers like Intel Corporation (NASDAQ:INTC) from here on out are games, virtual reality consoles, and everything you can stuff into the bag called the Internet of Things (IoT).
However, I believe that Intel stock is different. Before I go into the “Buck Rogers” reasons why I think Intel is different, and why Intel stock is one that investors with a long-term time horizon should consider owning, let’s look at the most recent trends.
INTC Stock Is Well Behaved
INTC stock has behaved very well in the last year or so, gaining almost 50% since the August lows of 2015.
Over the last three years, Intel stock has posted choppy—but not inconsequential—annual revenue gains and gross margin growth. The company has had (again choppy, but not inconsequential) net income. And INTC stock has shown very healthy amounts of cash on its balance sheet at the end of each of the last three years. Note that the huge influx of cash at the end of 2015 is the result of a successful $9.5-billion debt offering.
So from my perspective, Intel is a very well run company whose current financial position bodes well for its future. Before I go into a discussion about Intel stock’s future, it is appropriate to note here that like all semiconductor companies, Intel is a company in transition.
Since the 1980s, semiconductor companies have been making processors that mostly went into personal computers (PCs). And for the last five years, PC demand has been waning. PC demand may be on the rebound, but its future growth will likely be in the low single-digits into the foreseeable future. (Source:“PC Sales Bottoming Out”, Gartner, March 1, 2016.)
Intel does not peg its future on potential PC demand growth. Instead, Intel’s focus is on “powering the infrastructure for an increasingly smart and connected world.” In layman’s terms, Intel is focusing on big systems that require a lot of processing power. And the company is restructuring itself accordingly. It now defines its business in the context of six separate operating segments. Of these, there are two that I believe hold the most promise: data centers and IoT.
Intel’s “Data Center Group” makes systems, software, chipsets, and platforms designed primarily for big enterprises, cloud computing environments, and the world’s communications infrastructure. Intel’s “IoT Group” has a narrow focus on developing products for retail, transportation, manufacturing, and smart-building and smart-home use. (Source: “2015 Annual Report,” Intel Corporation, February 12, 2016.)
The reasons I believe these two business segments are the key to future gains in Intel stock are twofold. First, Intel is an incredible innovator. Second, Intel has the capacity to get cutting-edge technology to market faster than any of its competitors.
Robert Noyce helped invent the integrated circuit in the late 1960s and was a co-founder of Intel. In 1971, just three years after its birth, Intel created the world’s first commercial microprocessor chip. The company has nearly 100,000 patents. In 2011, Intel introduced one of the first commercial 3D transistors.
Intel has not abandoned the notion that “Moore’s Law” (the theory postulated by Intel co-founder Gordon Moore, that the number of transistors per square inch on an integrated circuit will double every year) is still viable. Intel has been improving its chips continually since their debut, and it currently spends more than $12.0 billion annually on developing new, smaller, faster, more energy-efficient processors. The company expects to release a 5-nanometer (nm) chip by 2020. (Source: “Intel Timeline: A History of Innovation,” Intel Corporation, last accessed September 21, 2016.)
The reason Intel should have a head-start on its competition and get these high-end, next-generation chips to market early is that the company manufactures products in its own factories. That in-house capability allows Intel to shorten its time-to-market and to scale new products more rapidly than other semiconductor manufacturers. And I don’t expect this competitive advantage will go away anytime soon, if ever.
The Bottom Line on INTC Stock
Arthur Rock, Robert Noyce, and Gordon Moore founded Intel more than 40 years ago. At the time, futurists predicted (and science fiction writers wrote about) self-driving cars, robots that would cater to our every domestic need, and computers that could think independently and make decisions. Today, technologists at Intel are making these things a reality. My expectation is that INTC stock will be a huge beneficiary of this.