Is Intel This Year's IBM?

NEW YORK (TheStreet) -- IBM (IBM) stock was rolling uphill until about a year ago, when it suddenly dawned on the market that much of the company's success was due to financial engineering, and the stock rolled over. Even with recent gains it's one of the dogs of the Dow, down more than 7.0% over the last year.

The same thing may now be about to happen with Intel (INTC).

Tech companies are generally valued for growth. Stock prices can be kept high with dividends and stock buybacks, but that's a short-term fix. In the end you need growth.

Intel has increased its dividend over the last five years from 14 cents a share to 23 cents, creating a yield of 3.4% at current prices. But sales peaked in 2011, falling slightly each of the last two fiscal years. Profit margins ticked down slightly in the fourth quarter. Intel plans to report first-quarter results next Tuesday. The stock currently trades at a price-to-earnings ratio of 14.3, while IBM's P/E is 12.9.

Intel shares have been doing well over the last year, gaining about 23%, but the company's position in the "great game" of technology is increasingly precarious.

Intel recently lost out on supplying chips to the Samsung Galaxy Tab 4, to Qualcomm (QCOM). Intel did win a contract to supply phone chips to Asus for the China market. Do the two deals offset one another? If they do, it's barely.

Intel has also announced it's closing its chip testing and assembly operations in Costa Rica, eliminating 1,500 jobs. Intel explains it is moving these to Asia for "geographic closeness between plants and main markets," which sounds like the U.S. market isn't performing.

But the company changed its financial reporting structure so now it's all good? That's what Michael McConnell at Pacific Crest Securities recently decided, causing the stock's price to pop after he gave it an outperform rating.

Is he right?

The financial change will move sales reporting into six piles, with gateways and set-top boxes going into the PC pile. Numbers will also be reported on the Internet of Things, on Data Center products, on mobile and communications, and on software, with an additional catch-all category called "other."

As I wrote in January Intel is still seeking its next big thing. As I added more recently, its investment in Cloudera won't solve its growth problem. 

The growth problem has two causes.

The first cause is ARM Holdings (ARMH), which outpaced Intel for years by delivering low-power designs that phone and tablet makers could customize, rather than finished chips.

The second cause is cloud, where companies such as Google (GOOG) and Facebook (FB) have been building their own systems with low-cost commodity chips rather than high-end server chips with high profit margins.

Intel is trying to address both problems, and the Asus deal is positive. But in most growth areas Intel is trying to do things it's not well-known for, such as building finished systems instead of just chips, or creating consumer brands, or pioneering in untried technologies such as the Internet of Things.

Intel's growth strategy is speculative, in other words. Yet it's pushing more than $1 billion a quarter out the door in dividends, and it spent another $2 billion last year buying back its own stock.

Intel is not going broke. It can continue along its current path for some time. But it is rapidly eating its seed corn and needs to show some top-line growth soon if it wants to continue justifying a rising stock price.

At the time of publication the author owned shares of GOOG.

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

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