Intel Inc. Has Forsaken Cybersecurity
It’s certainly a gamble, but Intel Corporation (NASDAQ:INTC), a company that has become practically synonymous with microprocessors, has all but renounced its cybersecurity pretensions. This is six years after buying what was then the world’s second-largest computer security outfit McAfee. That union spawned Intel Security Group. Judging by the market reaction, INTC stock has absorbed the news well.
Indeed, INTC stock closed marginally down after gaining four percent in the last month. Now Intel is giving the whole kitchen sink away; it will retain about 49%. But it has relinquished control to the TPG fund. The transaction will bring some $4.2 billion to Intel from the sale. But Intel stock will not be feeling any pleasant effects, at least not yet.
McAfee Doesn’t Fit the New Vision
Intel paid $7.68 billion in 2010 for McAfee. At the time, the chip-maker wanted to diversify its activities, identifying cybersecurity as the target. Its goal at the time was to boost the value of INTC stock by integrating software solutions from McAfee to Intel chips. But the hoped-for convergence has never occurred.
So, the sale comes out of a bad experience. But, investor beware, better to get out early than to let the problem linger. Thus, Intel has been looking for a buyer for several months now. As for McAfee itself, it was always profitable. So, Intel is not giving it up because of any missed revenue targets. McAfee remains a heavyweight in the field of cybersecurity.
But what Intel was not able to do is integrate cybersecurity in its chip business. Thus, McAfee only accounted for some five percent of Intel’s revenue (about $2.0 billion), whereas Intel rakes in about $55.0 billion in annual sales. (Source: “Five Reasons Intel Should Spin Off McAfee,” Forbes, July 21, 2016.)
Intel is now free to shift attention to new priorities.
INTC stock will ultimately benefit from a renewed focus on growth. Intel did not ride the smartphone wave as well as some competitors. (Source: “How Intel missed the iPhone revolution,” TechCrunch, May 17, 2016.) This forced it to remain concentrated on the losing end of the computer market: personal computers (PCs).
Therefore, to beat the doldrums and push for the kinds of earnings that will push INTC stock to the next level, Intel is branching out to emerging technologies. It has made a big bet on the Internet of Things. This will imply a bit of a shakeup within the organization, not excluding major job cuts.
Intel’s Best Days Are Ahead
Investors don’t need binoculars to see future earnings growth; it’s closer than it appears, just like that object in your car mirror. Year-to-date Intel shares have risen over seven percent. If you consider the last six months, the growth rate is an even more impressive 18%. The year 2017 could see a higher demand for Intel devices. (Source: “Worldwide Device Shipments to Grow 1.9 Percent in 2016, While End-User Spending to Decline for the First Time,” Gartner Inc, January 20, 2016.)
Intel may be giving up McAfee, but it did not stop looking for ways to boost sales. One of its 2015 investments, expected to contribute to such growth this year and even more in 2017 is the Israeli startup Replay Technologies, specialized in 3D broadcasting. Intel has thus found a way to tap into the growing market to digitize sports arenas and stadiums and 3D broadcasting in general. (Source: “Intel acquires Replay Technologies, sets sights on 3D sports broadcasting,” Arstechnica, March 9, 2016.)
Intel is also taking advantage of the drone revolution, working with other specialists like Qualcomm, Inc. (NASDAQ:QCOM) to enhance the quality of HD cameras. (Source: “Intel pours $60 million into drone maker,” Fortune, August 28, 2015.) So, while managing the (apparent) decline of PC demand, Intel will continue to restructure. The McAfee sale represents the latest such effort since the change process began in 2015. INTC stock has started to favorably reflect the changes so far this year. But the major bullish boost will come as Intel gets on track with the growing market segments as it cuts (but not eliminates) reliance on PCs.