Intel Corporation (NASDAQ:INTC) finds itself dominating a dying market, which is forcing it to assess other alternatives including an industry that has proved to be a thorn in the flesh for the semiconductor giant's business, the tablets industry.
The company will also wave goodbye to its long-serving CEO Paul Otellini in May. The prospect of the incoming CEO has been likened with the nature of the company's CapEx. Morgan Stanley (NYSE:MS) analysts believe that an outside CEO could change the trajectory, but are biased towards the status qua.
In a report published Wednesday, the analysts expressed absolute caution with regard to Intel's CapEx, which currently stands at $13 billion.
In the report, the analysts wrote: "While investors have questioned whether the $13bn capex will come down through the year, or whether it will be applied to foundry or wireless baseband, per the CFO [on Jan 30], it is what it appears to be: a solid forecast of a high CapEx number supporting material unit growth in the PC and tablet markets. We remain cautious as high spending levels are a negative for free cash flow yield and eventually margins".
According to Intel Corporation (NASDAQ:INTC) CFO Stacy Smith, the company expects the CapEx trajectory to remain on course going forward, even after the new CEO is appointed. The company has already reduced CapEx for both 2012/2013 by about $4.5 billion.
However, it is unlikely that the company will cut down on CapEx any further during the current campaign. Intel's massive capital expenditure is above Apple Inc.'s (NASDAQ:AAPL) total of $10 billion budgeted for 2013, and according to Morgan Stanley analysts, this is likely to cannibalize cash flows, and eventually margins.
Capital spending will also put pressure on the company's Free Cash Flows in comparison to peers. The analysts speculate, "While the company may be flexible in 2014/15 if demand is weaker, spending will stay elevated longer than we thought, limiting dividend increases or and buy backs; Intel’s response is that is only true if unit demand remains weak".
According to reports, Intel is determined to venture into the tablets industry in full force. The company will be looking to capitalize on an industry that has brought menace to its PC unit. According to Morgan Stanley (NYSE:MS), the company has clearly embraced tablets as an important factor and speaks of PC/tablet/convertible computing as a unified market with substantial growth.
The analysts wrote: "We agree that the combination of tablets and PCs will grow, but, for now, Intel’s tablet share remains small, and as it grows it will initially be at very low CPU price points". The analysts also reiterated their Underweight rating on the stock pointing to the fact that high spending in prospect of uncertain growth despite a likely recovery on the PC data points.
Intel Corporation (NASDAQ:INTC) closed at $21.37 on Wednesday, January 30.