Two weeks ago, I outlined my plans to create a portfolio of 10 companies that all have one thing in common: They provide a basic need or deliver life’s necessities. It’s my contention that basic-needs companies can offer investors stability and growth throughout any market environment thanks to consistent demand, incredible pricing power, and delectable dividends. This portfolio, which I have dubbed the Basic Needs Portfolio, will be pitted against the S&P 500 over a period of three years with the expectations of outperformance for all 10 stocks. I’ll be rolling out a new selection to this portfolio every week for the next eight weeks.
Today, I plan to introduce the second of 10 selections to the Basic Needs Portfolio: Intel Corporation (NASDAQ:INTC).
How it fits with our theme
Right now you’re probably scratching your head and wondering how a cyclical business like semiconductor chips could possibly be considered one of life’s necessities. I’ll freely admit that when I thought of the tech sector, my first notion was to go with an Internet or search company, since they’re the primary source of content distribution nowadays.
But think about it this way: What’s powering the laptop, smartphone, desktop PC, or television that you’re getting your content from? Bingo … a microprocessing chip. Intel Corporation (NASDAQ:INTC) absolutely dominate the microprocessing market when it comes to laptops and desktop PCs, garnering 85.2% of total market share according to Mercury Research in the first quarter.
This, of course, does have a lot to do with Advanced Micro Devices, Inc. (NYSE:AMD)‘ struggles and ongoing restructuring, which will refocus its business on gaming and cloud-based products. AMD can count chip wins in the upcoming Xbox One console and the PlayStation 4 as positives, and shareholders have to be pleased with the progress of its turnaround which included a much smaller first-quarter loss than the Street had expected of just $0.13. Yet when all is said and done, AMD is still losing money over the interim, and Intel Corporation (NASDAQ:INTC)’s market share figure is nonetheless impressive.
Intel is also working its way into the smartphone and tablet market via an ongoing partnership with Microsoft Corporation (NASDAQ:MSFT) while angling its investments for the future toward cloud-based hardware. It’s nearly impossible to make it through your day without running across a handful of technology-based items that run off of some form of microprocessor. This, I think, makes Intel the perfect basic needs selection.
The most obvious risk with Intel Corporation (NASDAQ:INTC) is that’s in the process of transitioning its chip production from being PC-based to cloud-based. The PC market is dwindling rapidly with the proliferation of tablets and smartphones, which could place added margin pressure on Intel if it doesn’t invest heavily in developing next-generation chips capable of powering cloud-based servers as well as smartphones and tablets. Research firm IDC, just last week, dropped its PC unit sales projections to minus-7.8% for this year with the expectation of another 1.2% drop in 2014.
Another factor working against Intel Corporation (NASDAQ:INTC) is that, despite its size, it’s still a small fry and new entrant into the smartphone market. Its Clover-Trail dual-core x86 Atom chip could be a game-changer … if it manages to gain any traction in a very crowded market. The concern here is that QUALCOMM, Inc. (NASDAQ:QCOM)‘s Snapdragon chip is the dominant force in mobile processing with 43% of all market share, and, as the only vertically integrated mobile company, can provide the complete package for mobile product developers. As an example, Qualcomm also recently introduced its revolutionary RF360 chip, which can handle RF band fragmentation up front, thus eliminating the need for an RF chip, and placing all of its LTE platforms under one family of chips. These RF360 chips will be available in the second-half of this year.
Even relatively new entrant NVIDIA Corporation (NASDAQ:NVDA) could pose trouble for Intel Corporation (NASDAQ:INTC) with its new quad-core Tegra 4i LTE-capable chips. Even though these new chips are energy-sucking battery vampires, NVIDIA is able to translate its graphics expertise over to its new line of processors to produce extremely high-quality images for people who use their smartphones as gaming devices.
The primary reason I’ve been attracted to Intel Corporation (NASDAQ:INTC) isn’t its recurring dominance in the PC market, but because of its potential in becoming the dominant force in big data-center hardware. Intel is already supplying a line of processing chips being used in Cisco Systems, Inc. (NASDAQ:CSCO)‘ new line of cloud-based servers. Furthermore, Intel’s management team is forecasting that 30% of the company’s revenue could come from the cloud by the end of the decade.