With the world going through so much fast-paced change, high-tech execs need to keep their eyes clearly focused on the future.
Sadly, some are still looking in the rearview mirror.
Take the case of Intel Corp. (NasdaqGS:INTC). The world leader in PC chips has just announced it’s borrowing another $6 billion.
Of course, borrowing money isn’t necessarily a bad thing. It’s the purpose of the debt that matters most.
Here’s the thing. Intel is taking on more debt to help it buy back more of its flagging stock. See, the senior brass think that at $20 a share, this is a great value. And on paper, they’re right.
After all, Intel has strong profit margins. Not only that, but its 15% return on assets is solid. It means that for every dollar the firm invests in assets, it earns 15 cents.
Try getting that rate on a bank CD. Or a T-bill, for that matter. Pretty much, it’s impossible.
No, the problem for Intel and its shareholders is the stock has become a “value trap.” In other words, investors buy the stock because they see they only have to pay nine times earnings and think it’s a great bargain.
But, as I like to remind tech investors, a $20 stock that goes down is a lot more expensive than a $200 stock that goes up. Look at it this way, if you had simply bought an index fund tied directly to the S&P 500 you would have made a nice 12% return so far this year.
Holding Intel, however, would have cost you more than 19% as of the market’s close yesterday. By buying its own stock, Intel isn’t getting anywhere near the return it could by simply buying a basket of equities.
And it’s actually much worse than it seems. This next number will blow your mind…
$45 billion. That’s the total amount of money Intel is willing to buy back to support the stock.
As I see it, this is a bad use of money for one of the world’s leading high-tech firms. We’re talking about a storied Silicon Valley leader whose history mirrors that of the entire computer world. It still plays an integral role in the global supply of personal computers.
No doubt, it is investing heavily in making its chips ever smaller and more robust. And for that we should be grateful.
But Intel faces a crucial question: is it making enough of the right moves to prepare for the Era of Radical Change? I believe the answer is no.
The world is now moving at warp speed. What was once science fiction is becoming science fact. Those high-tech firms that stand still will just get flattened.
Don’t underestimate the threat here. On the very same day that Intel announced its new debt issue, Investor’s Business Daily issued what should be a wake-up call. The story said a leading designer of mobile chips has entered Intel’s PC market.
Turns out U.K.-based ARM Holdings plc (NasdaqGS:ARMH) is now working with Microsoft Corp. (NasdaqGS:MSFT). In fact, Microsoft is using ARM chips on the new Windows RT operating system. So much for the so-called strong “Wintel” alliance.
As I see it, Intel needs to refocus the firm. Just treading water as a chip maker won’t prepare it to deal with the challenges coming from all the new tech players popping up every day.
But don’t take my word for it. There’s another high-tech giant that saw it needed to change to prepare for the future. This firm could have just stayed with its core computer franchise.
Had it done that, International Business Machines Corp. (NYSE:IBM) wouldn’t be half the company it is today.
Or should I say 85%?
Because that’s how much of Big Blue’s pre-tax income last year came from software and services. Yet, IBM still makes waves with powerful computers.
Just look at Watson. Brimming with artificial intelligence, Watson stunned the world last year by beating humans on the quiz show Jeopardy.
And did I mention that IBM’s stock sells for $189 a share, or more than nine times that of Intel’s? Over the past five years, IBM has returned more than 70% to shareholders. But Intel cost investors more than 25% over the same period.
The comparison of the two is apt for this reason. Last April, IBM said it will buy back another $7 billion of its stock. Clearly, IBM is getting a much better return on its money.
Some of you may say that Intel’s recent decision to make a line of mobile phones is a step in the right direction. Well ask yourself these questions: 1) does the world really need yet another Android phone, and 2) is this the best use of Intel’s money?
To me, it’s no on both counts.
Let me close by noting that Intel has a great chance to set a new course. CEO Paul Otellini retires next May.
Intel needs to make sure its next CEO has a battle plan to deal with the tough challenges that await it in the Era of Radical Change.