Intel Corporation (NASDAQ: INTC) has consistently missed on finding the up and coming trends in technology over the past decade. It missed mobile initially and continues to have a difficult time penetrating that market with the likes of Qualcomm (NASDAQ: QCOM) and Broadcom (NASDAQ: BRCM). Intel did make an acquisition in a potentially high growth area though its acquisition of Basis Science. It reportedly beat out heavy weights Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). Basis Science is a health watch/fitness monitor firm and provides exposure to the wearable technology market.
Investors should proceed with caution on Intel that things have changed at the tech giant. Investors in Intel have experienced underperformance versus the NASDAQ since mid-2012, with the NASDAQ outperforming Intel by around 60%. There is just not much of a reason to get excited about Intel.
Intel – Purchase of Basis
Intel acquired Basis for reported range of $100 – $150 million this week, a small deal based on size of the transaction. Basis produces heath tracker wristwatches to monitor a user’s heart rate, activity and sleep patterns. The company has a 7% market share in the health tracker device market. Apple and Samsung have or are entering this market as well. Intel made the purchase to further its aim to become the dominate chip supplier to this new technology subsector. It has developed a low-power CPU called Quark for the devices. Qualcomm is also competing for position in the chip portion of this market.
This deal is probably not the reason to invest in Intel. First, wearable tech like watches may not be the next big thing but a small niche. Two, if Intel outbid Apple and Google, how much did it overpay for Basis and what does this say about the management team. While it has the cash to make these deals, investors still want that cash deployed rationally.
My Recent Experience Shows Little Reason for Excitement
An article published on Wednesday, March 5, 2014 on The Street discussed Intel’s purchase and accused the company of poking in the dark. It does appear the company is at least making an effort to diversify and find new end markets. However, while I am not ready to call wearable tech and watches the next big dud, they are not likely the next big thing either.
Over the past few weeks I shopped for a new mobile phone and stopped by all the major cell phone providers, T-Mobile, Verizon, and AT&T multiple times about setting up our business account. I took this as a chance to conduct an information channel check on devices and the mobile environment. I will follow up in another piece later but the three takeaways were:
1) T-Mobile has cause everyone to change their approach to contract pricing
2) Reps actually thought Windows Mobile and Blackberry were both very good OS’s, just lacked apps
3) Watches had little interest, sales were disappointing and they didn’t really do much given their cost. The new Samsung devices that were released were not selling.
For this article, the latter is applicable. Intel, through Basic, needs to find a way to provide enough functionality on the watches or other wearable tech that a large segment of smartphone users actually want them outside of niches, such as tech nerds and people who like to count steps. Given the size of the display, finding info that is worth displaying that cannot be addressed via a service like Siri could prove to me a challenge that has no solution.
Intel is far from a dead company but it is one that could really use some new end markets that grow. While its chips dominate the landscape for processors in PCs, notebooks and servers, these markets are facing challenges. Developed markets are buying fewer notebooks and desktops and emerging markets like Asia are more focused on low-cost versus quality chips at this point. All this said, Intel is a steady cash flow producer and will continue to benefit from an increasingly digital world. While wearables and heath monitor watches may not be the next big thing, developing a new type of low power processor could have other applications. That said, after the deal, just like before, Intel lacks a compelling reason to own the shares right now.
What are your thoughts on the wearable tech market?
Photo Credit: FeelArt
John has seven years of experience as an equity analyst following various stocks and sectors. As a senior equity analyst, he received awards from the Wall Street Journal and Financial Times for his writing.