Intel did not respond to a request for comment.
Its April 15 earnings report reveals a tepid performance. But I guess its stock moved up because of institutional bets that Intel would report slightly more disappointing numbers. Perhaps those investors covered their short positions -- driving up its shares. How mediocre was Intel's quarter? Revenue inched up 1.5% to $12.8 billion while net income tumbled 5% to $1.95 billion. The good news? Its 38 cents a share in earnings beat the consensus
Before getting into why Intel is dead money, it is worth pointing out that when it comes to explaining why stocks go up and down, there is no there there.
In a world where High Frequency Traders account for about half of all trades and those shares are held for at most a few seconds, how can fundamental analysis make a difference?
For those who are not flash boys, there must be some reason that they put cash into stocks or bet they'll fall. Perhaps they spend their days tracking where the biggest investors are going and try to follow their moves.
This might explain why shares of money-losing, but flashy, companies like Tesla see such rapid up and down movement.
For those who buy based on a company's performance and prospects, big companies like Intel are tough to analyze. Why buy shares of a company whose fastest-growing years are stuck firmly in the past?
This leads to the four reasons why Intel is dead money.
1. Law of large numbers
A big company trying to grow faster set a top-down growth goal. The CEO of, say, a $100 billion company says to his troops, "We must grow at 10% a year for the foreseeable future." To do that, the company needs to find $10 billion in new revenues in the first year thereafter and keep ramping up the new revenue sources just to keep up with that growth goal.
The CEO then gives bogeys to the people who run the company's product lines. For example, each of its 10 business units must add $1 billion in revenue. To hit their top-line target, those general managers either acquire companies or order their R&D departments to research new products.
Stacy J. Smith, Intel’s CFO told the New York Times, “When you get to be greater than $50 billion in revenue, it’s hard to grow 10 percent. We look at a lot of markets where we can get a half-billion dollars of growth.”
It all sounds logical but in the case of Intel, performance seems to fall short of the target. After all, Intel's 1.5% revenue growth this quarter was far short of that 10% growth goal.
2. Declining core markets
Nothing stays the same for very long -- especially in technology. In the 1980s, Intel -- with its CPU chips -- teamed up with
Intel seems to have fallen victim to the problem facing successful companies -- they can't bet on the next big thing without cutting the throat of old Bessie the cash cow -- PCs and servers account for 80% of Intel's revenues.
Rather than prevailing in the market for chips in the fastest growing markets of the last several years -- smart phones and tablets, Intel remains dependent on revenues from a once attractive market that has lost its allure.
For instance, nothing seems to be able to stop the decline in the PC market. IDC and Gartner reported on April 9 that worldwide shipments of PCs fell 4.4% and 1.7% respectively. It's unclear why they came up with different numbers but they both agree that PCs are not growing.
And that suggests one way Intel could grow would be to spin off its shrinking PC chip business and use the proceeds to invest in leading the most rapidly growing markets. But in so doing, Intel would likely have to sacrifice a big profit pool.
3. New addressable markets too small
Back in April 2005, I interviewed World Wide Web inventor Tim Berners-Lee who talked to me about the semantic web -- a network of things.
Late-to-the-party Intel is trying to profit from this -- reporting on a new division focused on the “Internet of Things” -- the "use of sensors, communication chips and analysis of data stored in vast “clouds” of server computers," according to the Times.
To be sure, you can find forecasts suggesting that the Internet of Things market is enormous. IDC put it at $4.8 trillion in 2012 -- growing at a 7.9% annual rate to $8.9 trillion in 2020. But how much of that huge number is the portion from which Intel could take market share? Can Intel come up with products for that segment that people will buy?
Intel did report $482 million in revenues from its Internet of Things segment -- it includes revenue from old products though and it's not clear what proportion of those revenues are from new ones.
The good news is that those revenues were up 32% from the year-earlier quarter and its operating income popped 84% to $123 million. Unfortunately, this new segment accounted for a mere 4% of Intel's revenues.
Nor does it help Intel that its effort to get into chips for tablets and smart phones is cratering. Its first quarter 2014 sales in the phone and tablet chip business tumbled 61% and lost over $900 million.
4. Richly-priced shares
Intel shares are not cheap. They trade at a P/E of 14 on earnings that are forecast to shrink 1.3% in 2014 and grow 7.7% in 2015. That P/E to Growth ratio of 1.8 is high -- I think 1.0 is fairly valued.
If stock prices moved on fundamentals, these four reasons would make a good case for not investing in Intel shares.
