Intel Signals Pain Ahead

Intel has long stood as a pillar of the American technology industry, made more attractive by its status as a Dow component and longstanding dividend. For longer-term investors, buying the dip has typically proved a no-brainer. However, with the changes to first quarter guidance and further blame placed on the outlook in core markets like Europe, Intel is facing mounting headwinds after the revelations about the company’s role in enabling the US National Security Agency to spy on foreign countries including American allies. This next dip might prove to be the big one.

Tech Led Recovery Will Precede Recession

Technology was certainly a leader in the recovery following the last financial crisis. Strong earnings remained relatively intact during the time period when the American economy was stuck in the depths of a nightmare. However, in the supposed recovery, Intel is facing shrinking cash flows as maintaining a dividend and buybacks has cut available cash to just over $14 billion in the fourth quarter. Share repurchases are currently off the table with the buyback blackout here until earnings are to be released on April 14th. Although forecast to resume after earnings are released, this is further evidence that the company is struggling to fund organic growth and instead choosing to return cash to shareholders.

The company has been seeking new avenues for growth amid the slowdown. Looking specifically at the ongoing acquisition talks with Altera (ALTR), which could prove the single biggest acquisition in Intel history, the company is attempting to expand its focus on the datacenter business amid a slowdown in mobile and PC units. The market reaction was most interesting with the valuations of both companies rising which is very unusual for a potential acquisition. Typically, the acquirer’s stock falls and the potential target’s stock rises approximately 15% which is a fairly standard premium. Intel’s stock has risen nearly 5% on the news with Altera gaining closer to 25%. Although expected to add approximately $2 billion to annual revenues, the gains from such a deal will probably not be felt immediately. Intel will be forced to spend more of its cash or possibly shares to finance such a deal which is currently valued at about $12.75 billion. 

NSA Blowback has not Abated

Intel (NASDAQ: INTC) made the infamous list of US technology companies that assisted with the NSA’s global spying operations after disclosure by former contractor Edward Snowden. The implications of this revelation have been fairly grave for American technology giants after foreign countries became less enthusiastic about technology companies’ cozy ties with an agency that knows no boundaries. Earnings might have been able to shrug off the incident in the short-term, but it reflects a longer-term problem as the industry seeks to restore its credibility.  It has already cost technology companies billions in lost revenues. The most recent tender by the Chinese Government for technology suppliers specifically moved away from American companies, issuing contracts solely to local companies in an effort to unseat American technology hegemony. The blowback is still in its infancy as companies reel from the longer-term impact of having to pivot strategies towards friendlier avenues of growth.

The Technical Take

The most recent revision lower in Intel’s earnings outlook is sure to put a dent in sentiment, especially with the existing headwinds facing the industry. On March 12th, the company came out with its latest revision, citing weaker business desktop demand and persistent softness in European growth as reasons for downgrading the outlook. Revenue expectations fell from $13.2-14.2 billion to just $12.5-13.1 billion in a matter of months, in-line with the developments in hard economic data. Recent sell-side downgrades are not helping sentiment. From a technical perspective, risks are also firmly biased to the downside after Intel stock fell through a key longer-term technical level. The drop below support at $29.66 paves the way for a test of the next major level at $28.43. Disappointing earnings could be the impetus that sees prices fall even further.

Looking at the trends and moving averages, the recent death cross technical pattern should be a wary sign for investors seeking long-term entry points. The 50-day moving average crossing the 200-day moving average to the downside presented an excellent shorting opportunity for shorter-term traders. Although the hyperbolic “death cross” statement does not necessarily represent the state of Intel shares, this indicates that risks remain skewed downwards in the near-term. Longer-term investors should take advantage of the dip to increase exposure especially if dividend strategies are the preferred investing methodology. 

Conclusion

To summarize, there are a multitude of factors colluding to drive the price of Intel shares lower in the near-term. Besides the increasingly difficult economic environment, the technology industry is contending with a slowdown and still suffering from credibility problems. Furthermore, pardoning the fundamentals including earnings revisions, the technicals point to continued losses in prices leading up to the earnings announcement in the middle of the month. Long-term viability for the company remains strong as evidenced by its emphasis on returning cash to shareholders via dividends and share repurchases. However, the short-term risks remain biased downwards as the company continues to operate in a difficult economic environment.