The
chip market has proven increasingly competitive in recent months, thanks to several companies eagerly pursuing a stake in what amounts to the pick-and-shovel market in several different gold rushes, from smart everything to e-commerce. No matter which of these you want to consider, you won't get very far without a computer of some sort being heavily involved. That's bringing in some exciting new dynamics to the chip market, and one of the latest features the Third Point hedge fund taking a hefty new stake in
Intel (NASDAQ:INTC) and making new suggestions accordingly.
Intel Reconsiders in the Face of a New Player
Reports suggest that, right now, Third Point currently holds about $1 billion in Intel stock. That makes it an important voice in any future developments at Intel, because at any time, it could put a fairly large knife in Intel's back by selling shares outright. Perhaps worse, it could sell them in a direction Intel would disapprove of, and make things even harder that way. So when Third Point started offering “encouragement” for new directions to pursue, Intel had little choice but to pay attention.
Thankfully, Third Point's current goal seems to be improving Intel's declining fortunes. The advice so far has been mainly focused on stemming losses and improving the bottom line, so that's certainly worth considering. Third Point has advanced such notions as getting out of manufacturing, which has been met with no shortage of controversy.
The controversy which came, for example, from analysts like Wells Fargo. Wells Fargo noted that Third Point's opinions on the matter certainly have justification, but the idea that Intel would throw over chip manufacture altogether seems like a bridge too far. After all, the notion that chipmakers at Intel are “demoralized” is hardly new, and the losses to other chipmakers like Advanced Micro Devices (NASDAQ:AMD) are not only well-known, but continue to be ongoing.
Wells Fargo noted that, while a joint venture or similar operation to handle Intel's chip fabrication was possible, it likely wouldn't go far enough to cover Intel's full output needs. Someone like, say, Samsung (OTCMKTS:SSNLF) may have sufficient know-how to make Intel chips, but they likely wouldn't ramp up production sufficient to cover what Intel would need.
A Mostly Stable Analyst Front
We know what Wells Fargo thinks about Intel right now, but how about the broader analyst community? Our latest research on that front is holding fairly stable, as the company has held a consensus rating of “hold” for the last six months. Currently, the “hold” rating is comprised of 10 “sell” ratings, 16 “hold” ratings, and 15 “buy” ratings. Six months ago, it was five “sell” ratings, 16 “hold” ratings, and 19 “buy” ratings. Three months ago, it was 10 “sell” ratings, 16 “hold” and 15 “buy”, so you can see that there's been some move toward the “sell” side of late.
The price target has rebounded slightly off recent lows but is still well below levels seen six months ago. Back then, Intel had a price target of $65.18. A month ago, that had fallen to $57.83, before rising to today's figure o f $58.06. Considering the recent trajectory of Intel share prices, though, those price target changes seem to reflect overall movement as much as any kind of projected outcome.
Preparing for the Next Round
There certainly is a case for Intel offloading at least some of its manufacturing operations. Outsourcing has been one of the big maneuvers of the last 30 years, and it commonly produces cost savings along with it. It often produces negative publicity, as well—announcing wide-spread firings tends not to endear a company to the public—but the cost savings are certainly present.
Intel has been venting market share for some time now, and needs to start winning customers back to the fold. Certainly, lower-cost products would be a way to do that, and taking advantage of outsourcing production could provide the needed cash to let Intel start subsidizing lower prices. That may not be enough without some kind of significant innovation to help out; after all, once the chips are in place they aren't likely to be replaced without a really good reason. Without a compelling case—and probably one beyond expense alone—there's not likely to be many moves away from AMD to Intel.
However, with Third Point providing a backstop, and Intel clearly looking to make changes, putting an investment in Intel right now could get you in on the ground floor of what may be a comeback to talk about. Eventually, chips require replacement, and if Intel can better position itself now to be the replacement of choice, it can recover lost market share and potentially come out ahead.
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