Intel proving to be another victim of the rise of tablet computers

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The world’s largest Chip maker, Intel Corp, is getting battered this afternoon with a 6.5% drop to $21.20 after reporting a weak sale outlook for the first quarter yesterday, together with a huge increase in its capital expenditure programme totaling $13 billion, a $2 billion increase versus 2012. The shares initially reacted positively on the top line earnings beat, but then slipped heavily as the delicate state of the PC market became clear.

The company reported a fall of 3% in revenue to $13.5 billion and a 27% drop in earnings for the fourth quarter, blaming a sharp fall off in PC chip demand. Not surprising given the problems of major manufacturers like Dell and Hewlett Packard. For the period ending Dec. 29, the company generated net income of $2.6 billion, or 48 cents a share, compared to net income of $3.4 billion, or 64 cents a share, for the same period in 2011. The company said net income came in at $2.6 billion, or 51 cents per share, compared with expectations of 45 cents. Annual profits fell 15 per cent to $11bn, on sales of $53.3bn, down 1.2 per cent.

Intel has sought to boost microprocessor demand in the ailing PC market by investing heavily in marketing investment in the lightweight “ultrabook” market in a effort to compete against portable devices and had hopes that the launch of Windows 8 by Microsoft would increase demand. However, the rise of the tablet computer, in which Intel’s chips are largely absent at the expense of companies like ARM holdings, has been painful of late. In addition, consumers are increasingly using mobile smart phone devices rather than sitting at traditional desktop computers. Intel appears to be being left behind.

Investors were particularly concerned that the company was upping its capex budget by 18% with a view to investing in new production technologies and products at a time when microprocessor demand is on a downward path. Intel is being hit by a double whammy of spending, more to keep up with technological advancement whilst at the same time being pressurised by low demand and reducing margins as price erosion concerns mount. With tablets and mobile devices taking share of the consumer’s spend from PC, this pattern seems unlikely to change and so challenging Intel’s strategy. Any rebound in growth, would seem to be years away given the fundamental structural shift in the market place.

Intel seems to have made a blunder a few years ago in not anticipating the smart phone/tablet phenomenon and instead focusing on maximising share in desktop chips. Not an easy problem to fix quickly without some heavyweight acquisitions. As mentioned in the Dell piece earlier this week, the technology landscape is in transition right now, and for now Intel is on the losing side of the shift – the ad slogon may say “Intel inside”, but perhaps not inside the right devices?

CEO Paul Otellini said in an analyst conference call that “We are in the midst of a radical transformation of the computing experience with the blurring of form factors and adoption of new user interfaces. It’s no longer necessary to choose between a PC and a tablet. Convertibles and detachables combined with Windows 8 and touch provide a 2-for-1, no-compromise computing experience.”. Lets see if his vision of a new world of consumer friendly PC devices, becomes a reality. 

Contrarian Investor UK

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