Intel – Rebuilding the Old Moat Unlikely

I bought into INTC in March of this year at a price of $30.85. I looked at INTC as short-term valuation reversion play. It was simply too cheap at the time relative to the market at the time. Having my holding appreciate >20%, and with no near-term catalysts within sight to drive the stock higher, I recently sold the position.

The basic reasons are as follows:

  1. INTC no longer has the same monopolistic powers which it’s alliance with Microsoft once provided. A new PC cycle could continue to serve as a minor catalyst, but Intel already relies too much on its PC and server segments for cash flow.
  2. Nvidia GPUs are ripping away INTC’s former bread and butter high-end performance market. I expect this trend to continue.
  3. ARM CPUs have captured a large portion of the mobile market, with QCOM and a bevy of other mobile semiconductor manufacturers waiting in the wings.

The intense demands associated with GPUs and mobile processor workloads, both fields which Intel chose to ignore for long periods of time, have forced Nvidia and ARM to become area experts with strong market positions. I don’t believe that Intel can overcome its own organizational entropy at this point, and decided to exit my position in favor of cash.

The counter-argument would likely be that Intel’s recent acquisitions like Nervana will put INTC on an equal footing with NVDA, but I don’t personally find the story that INTC is pitching to be very compelling at this point. FPGA could be an interesting avenue of development, but I am not sure that management fully comprehends the bind that it is in. Intel’s history is replete with examples of expensive tech acquisitions which fizzled.

Additionally, Google, Apple, Facebook, and even Microsoft have become adept at playing hardware vendors off of one another. A great example is what Alphabet and Microsoft each accomplished with specialized software defined networks, which helped them avoid being locked-in to a single network vendor.

While Intel is still cheap relative to peers, I don’t see a return to the good old days of monopolistic dominance. I also want to see more proof that INTC is all-in on Nervana and that the corporate culture is not broken. Consequently I sold my shares, and will be looking to see how FPGA develops. If it is truly a game-changing must-have solution which only Intel is capable of providing I may reconsider.

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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