Intel Corporation (NASDAQ:INTC), the world’s largest chipmaker, had been struggling with declining PC sales while trying to catch up in the wireless market. Now, Intel is waking up and taking a bold step into a surprising new sector: pay TV.
Why Intel Wants a Piece of Your TV
As reported by Bloomberg, “Intel Corp. is making progress in talks with Time Warner Inc (NYSE:TWX), NBC Universal and Viacom to obtain TV shows and films for a first-of-its kind online pay-TV service.”
By using its own set-top box to offer live channels and on-demand programming, Intel Corporation (NASDAQ:INTC) plans to offer an online product this year, which means Intel will be competing with Comcast Corporation (NASDAQ:CMCSA) and DirectTV (NASDAQ:DTV).
The pay TV industry’s three-year average revenue growth is only 8%, and its average net margin is only 6.7%. Intel has three-year average revenue growth of 14.9%, with a net margin of 20.6%. Thus, it’s logical to assume that Intel has a bigger goal than entering and competing in the lower-growth, lower-margin pay TV industry.
Furthermore, Intel Corporation (NASDAQ:INTC) may have to pay more initially for the content than existing cable and satellite-TV systems, as indicated by David Bank, an analyst at RBC Capital. However, Intel may be able to offer consumers more flexible services, more choices over the channels, and an easier-to-use electronic programming guide, according to Erik Huggers, Intel’s vice president for media.
Why Pay TV?
Despite the lower growth and lower margins in pay TV, and Intel’s initial high cost to acquire the content, the expansion’s nonetheless a logical move for Intel.
TV is expected to be the next big trend in tech. It can be a central display hub for communication, Internet us, software, and games, as PC, notebooks, and mobile devices continue to converge. It makes sense for Intel to step into TV industry to speed up its learning curve and develop an integrated hardware set by leveraging its current strength in R&D and leadership in the PC industry.
In short, getting into pay TV is definitely a good strategic move for Intel Corporation (NASDAQ:INTC), as its first step to dominate the chip sector again.
What’s the chance for Intel?
Critics don’t believe Intel will be successful in the pay TV market; it and other tech companies have failed at similar, previous efforts, including “smart TV” in 2010. Besides paying more for content, Intel may not be able to allocate adequate resources into pay TV, as it continues to fight in the wireless battle and maintains its dominance in the PC market.
Nonetheless, If Intel can successfully expand into TV (not necessarily dominating the pay TV market), it will have an edge integrating PC, mobile devices, and TV services. And if Intel can learn the landscape and build more partnerships instead of creating more competitors in pay TV market, it stands a better chance of success. Intel should focus on its core strength, not diversify beyond it.
By partnering with existing players in pay TV markets, Intel Corporation (NASDAQ:INTC) can leverage its technology with partners’ existing client bases to gain an edge and penetrate the market quickly. Intel’s success will lie in its ability to focusing, integrating, and leveraging instead of diversifying.
Intel Can Afford the Risk
Any good try in the pay TV market could be a catalyst for Intel’s share price, which has been suffering since August 2012. Analysts currently have a mean target price of $22.94 and a median target price of $23.00 for INTC, suggesting 5.42%-5.70% upside potential.
Analysts, on average, are estimating an EPS of $0.42 with revenue of $12.68 billion for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $1.93 with revenue of $53.96 billion, which is 1.20% higher than 2012.
Intel is expected to release its Q1, 2013 earnings on April 15. The company has unveiled positive earnings surprises in all of its last four quarters.
Fundamentally, there are a few positive factors for Intel Corporation (NASDAQ:INTC). Intel has a higher three-year average revenue growth of 14.9%, vs. the industry average of 11.9. It also boasts a higher operating margin of 27.4% and net margin of 20.6% vs. the industry averages of 22.7% and 17.1%.
Intel has a stronger ROE of 22.7 vs. the industry average of 20.2. Intel has lower P/E, P/B, and P/S of 9.9, 2.0, and 2.0 (vs. the industry averages of 23.6, 2.6, and 2.3), as well as a lower forward P/E of 9.9 (vs. the S&P 500’s average of 13.9).
From a cash flow perspective, Intel generates a strong cash flow of $18.88 billion, with a levered free cash flow of $4.48 billion, and currently offers an attractive annual dividend yield of 4.14%.
How to Invest
Intel Corporation (NASDAQ:INTC)’s solid fundamentals and strong cash flow should enable it to expand its growth into mobile or other growing markets. At current valuation, there is more upside potential than downside risk.
For bullish investors, consider a credit put option spread of June 22, 2013 $18/$20 puts, which will allow you to gain some upside credit premium, or to acquire INTC shares at a price below $20 upon options expiration.
Alternatively, for stock holders, covered calls on Intel Corporation (NASDAQ:INTC) remain a great strategy to boost income while providing limited downside protection. Investors can also review the following ETFs to gain exposure to INTC:
Market Vectors Semiconductor ETF, 18.76% weighting
Dow Jones U.S. Technology Index Fund, 4.54% weighting
QQQ, 3.64% weighting
Technology Select Sector SPDR, 3.12% weighting
Note: All prices are quoted from the closing of March 26, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
The article Intel: Pay-TV? Makes Sense originally appeared on Fool.com and is written by Nick Chiu.
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