Intel Corporation: The Bear Case From a Bull

By Anders Bylund Markets Fool.com

I have been an Intel (NASDAQ: INTC) shareholder since 2012.

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The semiconductor giant has treated me well. My original position has more than doubled (including the returns on nearly five years of reinvested dividends), and the effective dividend yield on those original shares stands at 5.5% today.

So I clearly qualify as an Intel bull.

But mighty Intel is not immune to business risks, and even long-term investors have to hit the "sell" button once in a while. What could Intel be doing better these days, and what would it take to make me an ex-shareholder?

Image source: Intel.

Intel's errors

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Last month, Intel announced a $15 billion buyout in the mobile technology space. Mobileye (NYSE: MBLY) is an established leader in its chosen field, and Intel can be forgiven for wanting to grab a high-quality entry ramp into the self-driving car space.

But Intel has a disturbing tendency to pull the trigger on some highly questionable deals. For example, the $7.7 billion acquisition of data security expert McAfee was supposed to kick-start Intel's own security efforts. Instead, the same operation was sold off to private investors last year, and that price tag was nearly 50% smaller. Mobileye could very well become another cash-burning experiment, and perhaps a very expensive one.

Right now, Intel is in the headlines for all the wrong reasons. The company recently disclosed a security flaw in business-class chipsets released in the last decade. Chip features intended to improve remote management of security fixes and system updates can be exploited by hackers to run any desired program without the system user's and owner's knowledge or approval. Patches for the security flaw started rolling out before any real-world attacks had been reported, so it's not the end of the world. But now, well-respected technology advisors fear that the imperfect module could be used as an attack vector in new and unexpected ways.

Intel needs to reassure its corporate users that the built-in system management tools won't become a brand new highway for hacker attacks. Failing to do so could drive many loyal Intel customers to competing chips from Advanced Micro Devices (NASDAQ: AMD) and other rivals.

Image source: Getty Images.

How Intel could make me cash in those profits

Mishandling the corporate processor market would be a grave mistake, so Intel most definitely needs to get back in the security saddle. Early patching of the recently disclosed security hole was a good sign, but it's all for naught if the fears of larger and deeper problems turn out to be true. If and when the results of this security scare start showing up in Intel's data center revenue reports, matched by AMD gaining ground in the same space, that would be a serious problem.

Intel also needs to show that it has a real plan behind the Mobileye acquisition. The platitudes served up with the deal announcement don't always work out as planned, so I'm going to keep an eye on Intel's upcoming moves in the automotive computing market. The price tag for Mobileye stopped at roughly 30 times the company's trailing sales, so there's a massive growth premium included. I have no doubt that self-driving cars and other automotive computing advances will become a massive market with room for many large and successful players, but it isn't obvious that Intel will be among them.

Finally, Intel shares have gained 23% over the past 52 weeks and are trading at fairly generous ratios of price to sales and enterprise value to free cash flows. This was done in the midst of a cooling PC market and the aforementioned execution errors. If the stock marches much higher without any significantly positive business triggers, it could make sense to take some profits off the table. And if I weren't such an Intel bull for the long term, these high prices could look like a warning sign -- it's a long way down if investors suddenly change their minds about Intel's fundamental value.

Final Foolish words

I'm not selling Intel today, and probably not in the near future. But these are the risks that keep me on my toes about the stock, and could push me up to the "sell" button at some point.

I'll keep you posted if that happens.

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Anders Bylund owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.