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Intel Results Continue to Slide

7/18/2013 12:55 PM EDT
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DMcCunney
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Re: zero sum game
DMcCunney   7/22/2013 12:59:40 PM
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No doubt Intel has a very precise methodology for determining when to make cuts.

Not so much when to make cuts, as what cuts to make.

R&D expenditures are a portion of total expenses.  Whan revenues and profits are off, you look to cut expenses to bring them in line with revenues, and R&D expenditures will be a target to reduce.

What isn't hitting its target is overall revenue and profit, so cuts get made.

Like any other high-tech player, Intel will have a number of R&D irons in the fire, working on what might become future products or improvements in underlying technology.  At a guess, the ones dropped/postponed will be the more speculative efforts with a longer timeline to bring to fruition.

I had just been optimistically thinking that things were turning up for Intal and the industry as a whole.


Hope springs eternal and all, but the industry is cyclic.  Any capital intensive industry will be.  They tend to "boom and bust" cycles, depending upon the state of the overall economy they are in.

The industry overall seems to be doing well enough, but the segment Intel is in is not.  The uses to which the technology are put have been shifting to areas where Intel has historically not been competitive, and Intel is playing catchup.  When the market for chips is increasingly in devices where power is the scarce resource and power consumption is a critical factor, and your chips simply use more power to perform an equivalent task than your competition, you have problems.

And the nature of the market means that those problems can't be addressed quickly.  Intel is probably refining it's low-power Atom cores for all it's worth to catch up with ARM, but the whole ARM architecture already has a strong market position and an ecosystem built around it.  Intel isn't going to get an Atom design win in a product currently based on ARM, because making the move would be a "throw out the baby with the bathwater" move for a vendor which did it.

mcgrathdylan
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Re: zero sum game
mcgrathdylan   7/22/2013 12:25:38 PM
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No doubt Intel has a very precise methodology for determining when to make cuts. So clearly something is not hitting its target, and as you say we don't know what it is. I had just been optimistically thinking that things were turning up for Intal and the industry as a whole.

DMcCunney
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Re: Not much sympathy
DMcCunney   7/21/2013 3:09:41 PM
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The bottom line is that I think companies like Apple, Intel, Yahoo, and Microsoft end up with a worst of both worlds scenario. They're shunned by many tech investors who are thrilled by fast-appreciation in stock price and shunned by traditional investors who view tech companies as the daredevil cousins of mainstream corporations.


This is not unique to tech companies, and Microsoft is a poster child for the issue.

Growth companies get lofty stock prices based on the growth, and investors like them because of the capital gains they can get on the appreciation of their stock price.

But in any industry, consolidation occurs, till you are left with two or three big boys who dominate the market, and an assortment of smaller players addressing niches the big boys don't find profitable.  Mature companies like that throw off gobs of cash, but don't have stock valus in th stratosphere.

When you trasnsition from growth to mature company, your stock price takes a beating, and investors whose interest is growth and capital gains are unhappy with you and make their displeasure known.

Bill Gates picked an appropriate time to step aside at Microsoft: he went out a winner, having built MS into a dominant company in its industry, and became for a time the richest man in the world.  But the markets MS served were saturated and further growth was increasingly hard to come by.  Steve Ballmer was left holding the bag and trying to support the stock price, and can't.  (To be fair, I don't think anyone else could either.)

One issue confronting any CEO is that the interests of the firm and the interests of the shareholders are not always identical.  The CEO want the company to survive, and still be there in ten years or twenty years.  Investors want results now, and what they desire in the short term interest can be against the long term interest of the enterprise in which they hold shares.

I'm confident Apple will still be around down the road.  Aside from a mountain of cash, they have a solid core business, revenues, and profits.  They are simply unlikely to find further growth, nd I don't see the iWatch providing it.

wilber_xbox
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Re: Intel's choice
wilber_xbox   7/21/2013 12:30:54 PM
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Infact not only Atom but virtually anything that Intel has been working on has actually not materialized as the company intended. There were lots of talk about Atom but the competition with ARM processors is yet to be seen.

Tom Murphy
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Re: Not much sympathy
Tom Murphy   7/21/2013 11:45:42 AM
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I think when talking about stock valuation, we also have to look at maturity.  Since the early 80s, with the launch of personal computers and related software, young tech companies were valued for stock appreciation. As the larger tech companies grew to giants with multibillion-dollar revenue, it naturally becomes harder to grow them at a rate of 20 or 30 percent a year.  A young tech company would be thrilled with $1 billion in new revenue, and its stock would soar, but Apple investors say growth is slowing, and the stock goes down.  So Apple and others do what other mature companies do: they pay dividends that increase return to investors and gives them another reason to own the stock. Investors, then, can compare them to General Mills and determine which is a safer investment based on return. Apple has the disadvantage of looking riskier because it retains the label "tech company."

But in the minds of tech investors, Apple still competing with younger, faster-growing tech companies, and investors who look for appreciation alone will choose the riskier, faster-growing companies.

The bottom line is that I think companies like Apple, Intel, Yahoo, and Microsoft end up with a worst of both worlds scenario. They're shunned by many tech investors who are thrilled by fast-appreciation in stock price and shunned by traditional investors who view tech companies as the daredevil cousins of mainstream corporations. 

Where to go from there? As DMcCunney notes, Apple could introduce another big thing (the iWatch might not be enough), or in my estimation, it could turn into a pretty boring company as far as investment goes. That may not matter for a long time; the company has a lot of cash. But it doesn't bode well for the Apple of 2025, if there is one.

DMcCunney
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Re: Not much sympathy
DMcCunney   7/21/2013 9:51:03 AM
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I know how the market is supposed to value a stock.  But share price is more linked to growth than anything else.  You can have strong revenues and high profits and take a beating on your share price because you aren't showing growth.  Many investors value capital gains far more than dividends and get them through growth.

I'm not surprised at Apple's stock decline and have been predicting it.  They got a stock price in the ionosphere on the basis of category defining products that created new markets.  But Apple has historically staked out the high ground in markets they address where thy can charge the highest prtices and make the biggert profits.  There is evidence of saturation in the markets they address, and my assumption was that if Apple didn't have another category defining product that would create a whole new market up it's sleeve, their stock would tumble.

If they have one, thus far they haven't unveiled it.

Tom Murphy
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Re: Not much sympathy
Tom Murphy   7/21/2013 12:28:11 AM
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Well, that's almost right, DMc.  The market prices shares based on anticipated future return on the investment -- the yield on the investment.  And I think that's a pretty fair way to do it. If I can get 10% from company A, but only 5% from company B, then I'll invest in A.  (Yield, of course, also includes any dividend in addition to share-price appreciation)

Apple shares lost 38 percent recently due to the likelihood its growth is slowing, and Intel is drifting back into the doldrums, so I'm not surprised to see either stock fall.  The hard question is: where should investors put their money these days?  Real estate is doing very well, and that has drawn some of the more speculative money away from the highly volatile tech sector. 

Not related, but there's an interesting essay in Barron's today about how stocks are near an all-time high, while the municipal bond market (traditionally a fairly safe haven) is being rocked by the bankruptcy in Detroit and the growing pension crisis in other cities. Who would have ever thought that municipal bonds would be riskier than stocks?

DMcCunney
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Re: Not much sympathy
DMcCunney   7/20/2013 11:49:08 PM
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No, but it's symptomatic of the current market.

The market wants growth, and rewards it with a high stock price.  If you don't show growth, your stock price gets hammered, and it doesn't matter what sort of money you made.

Intel's stock will continue to languish because they aren't showing growth, and face the challenge of where to find it.

Tom Murphy
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Re: zero sum game
Tom Murphy   7/20/2013 7:20:47 PM
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Agreed, DCMcCunney.  I'd be very surprised if a company with lousy earnings increased it CapEx, unless it announces a bold new strategy.  I love it when that happens -- it becomes fun to watch -- but that's not what i happening with Intel.

DMcCunney
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Re: zero sum game
DMcCunney   7/20/2013 10:47:28 AM
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But PC margins are razor thin. I'm sure tablet margins are too. I would think the semiconductor content is similar, right?

I think so.


The trend in any product market is commoditization.  The original IBM-PC provides a good example.  The earliest PCs were expensive.  I recall an employer back in the late 70's, when PCs were first appearing on the corporate desktop.  A new PC popped up in my area, with a (gasp!) 5MB harddrive.  As I recall, the drive alone cost $5K.  But the PC defined a standard, and others designed to it.  Many vendors got into the PC market.  We reached the point where we are now: given specs, it largely doesn't matter whose name is on the box, and the purchase decision comes down to price, with the lowest cost producer winning.

Tablets are recapitulating that market even faster, though the name on the box still carries more weight than it does in the PC market,  Apple has staked out the high end of the markets it's in, and commands a substantial price premium.

The semi-conductor market is the classic capital intensive industry.  The single biggest cost is the fab to make the chips, and the biggest component of the cost of a chip is an allocated share of the cost of building the fab.  The more chips you produce, the smaller that allocated overhead can be, and the cheaper you can sell the chip.

It means that if you build a fab, you need to make and sell a lot of chips, simply to generate the revenue to cover costs and keep the fab in operation.  It's why more and more companies are going fabless, and we're seeing increasing joint ventures among those who haven't.  As migration occurs to progressively smaller process geometries, the cost of a fab skyrockets, and very few players can afford to build one. 

In the consumer electronics market, you areguably can't make money on the hardware you sell to the user.  The value is in what the user can do with it, and that's defined by software.

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