Intel (INTC) Plunges After Bleak Outlook Sinks Investor Confidence

Shares of Intel (INTC: Charts, News) plunged last Friday, after the largest microprocessor company in the world posted bleak guidance that confirmed investors' fears that it was losing ground in the critical tablet and smartphone battle.

The company posted fourth quarter earnings of 48 cents per share, or $2.6 billion, on revenue of $13.9 billion. Earnings dropped 27% while revenue slid 3% from the prior year quarter. Although Intel's earnings were weak, they still topped the analysts average forecast of 45 cents per share on revenue of $13.5 billion. Intel attributed its lower earnings and revenue to lower PC sales and additional challenges from its arch rival ARM Holdings (ARMH: Charts, News). Daily Chart
U.K.-based ARM Holdings, which controls 90% of the smartphone and tablet processor market, has pushed Intel into a corner with its lower-powered chips, which are a necessity for mobile devices. ARM does not manufacture any chips on its own; rather, it sells intellectual property rights to other chip manufacturers, who then assemble specialized ARM chips for their devices. Apple (AAPL: Charts, News), Qualcomm (QCOM: Charts, News), Nvidia (NVDA: Charts, News), AMD (AMD: Charts, News) and Marvell (MRVL: Charts, News) all license ARM's technology. This flexibility has made Intel's mobile chip - the x86 architecture Atom - look rigid by comparison. In addition, the Atom still cannot match ARM's power efficiency. Since 2006, Intel stopped licensing ARM processors, divesting its arm of XScale mobile and embedded processors to Marvell Technology for $600 million. At the time, CEO Paul Otellini believed that Intel needed to concentrate its efforts on its core competency of x86 processors for laptops, desktops and servers. This was a dire move that caused Intel to completely miss out on the smartphone and tablet revolution that started with Apple's seminal iPhone in 2007. Intel generates 64% of its revenue, as well as its highest margins, from PC chips. The company has struggled to revive the lagging market, with the assistance of Microsoft (MSFT: Charts, News), Hewlett-Packard (HPQ: Charts, News), Dell (DELL: Charts, News), Lenovo and many others, but to no avail. The latest attempt at recapturing some of the Wintel empire's lost glory - the Macbook-air inspired ultrabooks' - were met with a muted response. Otellini continues to tout the new ultrabooks, which run on Windows 8, stating that there were now 140 new models on the market, which "blur" the lines between laptops and tablets with features such as detachable tablet screens. Looking forward, Intel forecasts lower revenue and profit margins in 2013. That bleak outlook sank shares to the point that its market cap dipped below Qualcomm's - an alternative' chip maker that Intel had never taken seriously as a contender. Yet Qualcomm's success has been driven by ARM processors, which Intel to this day refuses to license again, despite the outcry of investors. Despite weak fourth quarter earnings, Intel, which has always operated on the principle of creating the highest-powered chips in the industry, plans to spend $18.9 million on R&D in 2013. This is an increase from the $18.2 billion it spent in 2012, and $16 billion in 2011. CFO Stacy Smith stated, "People expect Intel to make more powerful, more efficient devices. That applies across all our businesses." Intel still exhibited strength in its server business, with revenue increasing 4% from the prior year quarter. However, ARM recently introduced a 64-bit chip - the Cortex A9 - which is intended to hit Intel's server business with promises of lower power consumption. As data centers grow in size, the demand for more power-efficient chips will become a necessity in cost reduction. Intel trades at 10.3 times forward earnings with a 5-year PEG ratio of 1.26, so there is no question that it is undervalued. However, the company needs to step up its game against ARM Holdings if it intends to win back investors. Other News About INTC Intel Corporation Posts Results Intel disappoints investors again. Intel's Profit Falls 27% as PC Sales Drop ARM takes a bite out of Intel's top and bottom lines. Other Stocks in the News Apple: Time For Sell-Side To Throw In Towel? Are the bulls ready to return to Apple? GE Reports Strong Rise in Earnings GE posts a pleasant surprise. Copyright 2013 by, Inc. 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Published on Jan 21, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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