Since the beginning of 2013, shares of Intel Corporation (NASDAQ:INTC) rallied by more than 16%, which is roughly in-line with the progress of leading stocks indexes. Despite this rally, Intel has yet to recover from its tumble during the second part of 2012, which was partly stemmed from Berkshire Hathaway Inc. (NYSE:BRK.A)’s departure back in September 2012. Since then, Intel’s revenue continues to dwindle and its profit margin further shrank. Is Intel Corporation (NASDAQ:INTC) an investment worth having?
Intel’s dominance in the PC and laptop markets isn’t questioned. But the company has yet to make a dent in the smartphone and tablet markets. Now the company is ready to take the next big step in mobile and tablets with its new Haswell chip lineups. Moreover, Intel Corporation (NASDAQ:INTC)’s Haswell chip could also be a game changer in the laptop market. If this new line of microprocessors pans out, this could bring Intel back to its former glory days. Let’s see why.
Will Haswell become a game changer?
I think this is the most important question Intel Corporation (NASDAQ:INTC) investors should ask. Intel’s dominance in the PC and laptop microprocessor markets isn’t questionable. The main issue will be whether the company will be able to take a sizable market share in the tablet and smartphone markets, and whether it will be able to augment the demand for laptops.
The company’s new fourth-generation core processors, which are also named Haswell, will be revealed in early June. The company has been putting out a new generation of processors on a yearly basis so what is different? The difference is that the new processor is claimed to increase battery life by 50% for laptops and by 100% for Ultrabooks; it will also double the graphic performance in laptops and triple that of desktops.
If these specifications actually come through, this could mean a game changer that might shift more customers toward Ultrabooks and laptops. Moreover, Intel also expects to introduce this Haswell processor to tablets. This could bring Intel Corporation (NASDAQ:INTC) one step closer toward taking away the dominance of other leading companies such as ARM Holdings plc (NASDAQ:ARMH) or QUALCOMM, Inc. (NASDAQ:QCOM) .
Entering the tablet and mobile markets
It’s well established that Qualcomm has a strong hold in application processors and LTE cell-phone modems with a market share of 50% and 86%, respectively. In comparison, Intel’s market share in the application-processor market was less than 13% in the first half of 2012. Intel’s new ‘Silvermont’ chip, if the promises will follow through, could make Intel Corporation (NASDAQ:INTC) a serious contender in these markets. Based on the current promises, Silvermont will operate at three times the speed of Intel’s past Atom processors and will use only one-fifth of the power consumption.
ARM Holdings plc (NASDAQ:ARMH) controls more than 90% of the smartphone-processing market. This means Intel will have a very rough road ahead until it is able to augment its market share in the mobile and tablet markets.
In the meantime, QUALCOMM, Inc. (NASDAQ:QCOM) and ARM Holdings haven’t been waiting for Intel to catch up as these two companies continue to allocate a higher percentage of their revenue to research and development as indicated in the chart below.
But if Intel Corporation (NASDAQ:INTC) succeeds in augmenting its market share in mobile, this could pull up its profit margin that has been falling in the past several quarters.
The chart below shows the profit margin of ARM Holdings plc (NASDAQ:ARMH), Qualcomm and Intel in the past several quarters. As seen, the operating profit margins of ARM Holdings QUALCOMM, Inc. (NASDAQ:QCOM) have been rising, while Intel’s has been falling.
In terms of revenue, Intel’s net sales declined in the first quarter of 2013 by 2.5% (year-on-year). In comparison, ARM Holdings plc (NASDAQ:ARMH)’ revenue spiked by 28.5%; Qualcomm’s revenue sharply rose by 23.9%. The high profitability and revenue growth are two factors that Intel is trying to regain by attempting to increase its smartphone market share.
Even though Intel Corporation (NASDAQ:INTC)’s profit margins and revenue have been falling, investors have slowly come back to this company. One indication for this shift in sentiment towards Intel is the recent fall in Intel’s CDS.
Intel’s CDS continues to fall
Intel’s credit default swaps (five years, in USD) continued their downward trend during 2013: They have declined from nearly 58 back in December 2012 to nearly 49 as of the beginning of May. This is a 16% drop. The current price means the annual premium is $49,000 in case of a default of $10 million of debt within the next five years. The chart below shows the developments of the five-year CDS price during 2013 (daily prices).
The drop in the company’s CDS implies the market estimates Intel’s risk of default is falling. Moreover, the sharp recovery in the company’s stock price may have also contributed to the drop in CDS.
The Foolish bottom line
Intel’s new processors might just be the game change the company has been trying to achieve in the past several years. I think part of the optimism in Intel Corporation (NASDAQ:INTC)’s new chips is reflected in the recent rally in the company’s stock price. But I think the company might still be undervalued. If the new chips significantly augment the company’s market share in mobile and tablets and reignite the demand for laptops and Ultrabooks, this could sharply pull Intel’s market value higher.
Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and QUALCOMM, Inc. (NASDAQ:QCOM).
The article Is It Time to Put Intel Inside Your Portfolio? originally appeared on Fool.com.
Lior is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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