In 2013, Intel underperformed the Nasdaq index by 12.7%, and investors became concerned about the end of the era of Wintel domination. The Wintel alliance was virtually unstoppable from the 1980s to 2000. In April 2013, the research firm IDC issued an alarming report saying that world-wide shipments of laptops and desktops fell 14% in the first quarter from a year earlier. That was the sharpest drop since IDC began tracking this data in 1994 and marked the fourth straight quarter of decline – IDC Expects PC Shipments to fall by -6% in 2014 and Decline Through 2018.
Investors have been betting on mobile and tablets to fill the gap, but it doesn’t appear that the numbers investors were hoping for will ever materialize. As we know Intel does not have a strong mobile presence, Qualcomm has dominated this market segment for many years. The market for tablets and book readers has cooled down and it doesn’t appear that they will ever achieve the volumes investor were looking for.
Regardless of this ‘crisis’ in the PC industry, I believe Intel still has a lot of potential. Investors should stop looking to PC shipments as a means of assessing a potential investment in Intel. What is now driving the growth at Intel and will become the next big things are wearables, servers, and the Internet of things. While these three are still nascent product categories, Intel is already playing a big development role in each of them.
“Wearables” is still a new product category, but one that Intel has a vested interest in. Earlier this year, the company acquired wearable maker Basis for around $100 million. Some day soon the term wearables will no longer only be synonymous with wristbands. Applying technology to fashion is just beginning to emerge as a new approach to integrating technology products into our daily lives, and so far we have only seen the tip of the iceberg.
The global demand for datacenters and servers is growing exponentially. As cloud services become more available and affordable, servers will play an increasingly critical role. Cloud, networking, high-performance computing, and enterprise revenue all grew more than 15% in the second quarter of 2014 for Intel. The company’s data center business also had a strong second quarter with 19% growth year-over-year leading to all-time record revenue $3.5 billion. The server processors division is now the most important division at Intel – generating 26.9% of the total revenues, 5.7% more than notebook processors (21.2% of total revenue) and 12.8% more than desktop processors (14.7% of total revenue).
Internet of Things
Finally, the Internet of Things is another area where Intel could see a lot of growth in the near future. This business segment grew 24% YoY in the second quarter of 2014. The Internet of Things division is growing fast as Intel brings intelligence to more and more devices. The “Internet of Things” division now generates 8.5% of total revenues for Intel. While this may seem like a small percentage, keep in mind that this is a category that was basically non-existent just a couple of years ago.
Intel makes up 3.41% on my portfolio, but this is a position that I will most likely increase in the near future. I see big opportunities for Intel down the road and I really like the senior management of this company. Additionally their dividends, stock buybacks, and cash flow all meet my standards.
Below the performance of other positions in my portfolio
Summary Portfolio Performance
Since inception (01/19/12), the model is up 53.4%, versus the S&P 500 62%. The return of the S&P 500 in August 2014 was 3.77%, as compared with 3.89% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 10.87% as compared with 8.39% of the S&P 500.
In August JC Penney (JCP), Ralph Lauren (RL) and Apple (AAPL) all performed well. They were up 15.1%, 8.6%, and 7.2% respectively. JCP continues on its road to recovery by focusing on discounts and promotions to bring back customers. They are also adding more items to the company’s portfolio, while private labels are making a comeback in JCP stores. These strategies appear to be working well as sales are increasing and losses are dropping.
Ralph Lauren (RL) continues to perform well. The company has beaten analyst EPS estimates in each of 4 most recent quarters. Ralph Lauren’s balance sheet looks great, with $15.55/share in cash and short-term investments.
Finally, Apple (AAPL) is up, ahead of the release of the bigger and better iPhone 6 and perhaps other new products that could boost sales.
In August Lukoil (LUKOY) was down -0.5% and was the only position in the negative territory for the month. As the conflict in Ukraine persists, most likely Russian stocks will continue to underperform in the market. The company is very cheap based on different valuation standards, so as soon as the conflict is over, I expect this stock to fly really high.
Acquisitions in August 2014
In August 2014, I didn’t add or increased any positions in my portfolio.
Liquidations in August 2014
No positions were closed in August.