Intel Still Seeking Next Big Thing

NEW YORK (TheStreet) -- Intel (INTC) missing on earnings is no longer big news.

But now it's getting embarrassing.

Just 40 years after co-founder Gordon Moore wrote his famous article detailing how microprocessors would change the world, the company is losing its niche and walking right into a market that Google (GOOG) wants, the Internet of Things.

Intel rose to fortune by holding the center of the market, the PCs and servers that were computing's middle class. But PC sales were flat year over year in its latest report, and server sales are not as strong as the company predicted, growing 8% year over year, as cloud expands the high end of the market using commodity chips, and devices take the low end.

Intel remains a sales and profit machine. Full-year revenue was $52.7 billion, net income was $9.6 billion, or $1.89 a share. Intel said it generated $20.9 billion in cash from operations, paying $4.5 billion in dividends, and used another $2.1 billion to repurchase 94 million shares of its stock.

Sounds great, but revenue was actually down 1% from 2012 levels. Gross margins were down 2.3%. Net income was down 13%.

Moore's Second Law demands more.

This is the flip side of the original Moore's Law. While chips grow more complex each year, they also get more expensive to design and get into production.

This means Intel must constantly grow just to stay in place. With Intel having mainly missed most of the device boom to products based on ARM Holdings (ARMH) designs, it needs a hit to justify its increased capital expenses.

Intel was a phenomenal growth stock in the 1990s, but now is mainly a yield play. Its 22 cent-a-share dividend gives it a yield of 3.4%, and the stock buybacks mean earnings per share will rise even if actual earnings fall, because there are fewer shares.

To keep earnings going, Intel is now having to cut some corners. The company is delaying the opening of a new Arizona factory once held up as a model of American ingenuity by President Obama. Intel said it will upgrade other factories instead.

Intel's answer to its growth problem is Edison, a PC the size of a camera's memory card that is designed to start a whole new class of "wearable computing," announced by Intel CEO Brian Krzanich at the Consumer Electronics Show.

Such systems could alert wearers to the possibility of a heart attack, or calculate the strength of a workout.

Embedding sensors, computers, and communications into other products lets your lawn water itself, your car know when it needs a checkup and a city's streetlights coordinate traffic.

The problem is that Google is already knee-deep into this area, with products such as Google Glass and, most recently, a contact lens that can continually monitor a diabetic's blood sugar levels. 

The Intel strategy is to do what it did with PCs, sell basic products to a network of Original Equipment Manufacturers (OEMs) who can then innovate great products. An example is the Mimo Baby Monitor, which can monitor a baby's respiration, skin temperature and activity pattern, reporting via WiFi to a parent's smartphone.

But Krzanich's CES announcement didn't include any huge OEMs, only some fashion names and Barneys New York. It was later revealed by PC Magazine that some of the devices Krzanich showed off didn't contain Intel chips at all, but chips based on ARM designs. Intel licenses ARM designs but considers it a rival.

In looking at the bright side of its earnings release, Krzanich pointed to the "stabilization of the PC market" and said some things shown at CES "weren't on our road map six months ago."

But stabilization isn't growth, and no one really cares about Intel's road map. They want to know where growth is coming from. If Intel can't deliver some growth soon, calls to break up the company into design and manufacturing units are certain to grow.

At the time of publication, Blankenhorn owned shares of Google.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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