Intel and the long ARM of Microsoft. (INTC) (MSFT) (ARMH)

So, where do I want to go today??? You may have surmised dear reader that my opening statement is referring to the tag line from one of Microsoft's MSFT ad campaigns. A few days ago I penned a piece discussing Intel Corp. INTC. Today the stock dropped again even though it is oversold on the daily chart and the drop occurred on only about (60% Tuesday)  85% of its average daily volume indicating that it was not being all out dumped. Doesn't it always figure that when you profile a stock that the first thing it has to do is drop in price?

What was the reason for the after hours decline of Intel shares on Tuesday that carried over to today? I am sure you will be shocked to find that Tuesday evening  a “Fast Money” CNBC correspondent, Jon Fortt, who is supposed to focus on technology essentially bad mouthed Intel due to a related story about Microsoft and ARM ARMH chips.  Fortt actually called the news “a nightmare for rival Intel”. He also said that it would be couple of years before the Microsoft for ARM product comes to light but it would intensify the battle within the software and technology sector. 

It also boggles the mind why Intel's public Relations department sits on their hands rather than do their job. There has not been a peep out of Intel from the CEO Paul Otellini down. The irony here is that Intel is involved in communications from a technology perspective but on a human level they like so many other companies don't appear to know how to play the Wall Street game.

I am absolutely stunned by the “Fast Money” report having any impact for a variety of reasons. First, It would appear to me that since ARM chips already have a strong position in both the Tablet and Smartphone arena that they are the ones that are vulnerable not Intel. The tablet and smart phone space is a new arena for Intel and they are in the position of carving out market share not losing it.

The second problem with this Fortt's logic is that the Windows 8 OS (operating system) which is supposed to be ARM compatible is not going to be even available for a minimum of 2 years as it is scheduled to release in 2012 or later. 

Third, the Win-Tel OS has been dominant for years and the software already is fully compatible with Intel chips . It would take far less to scale the windows 8 OS down to an Intel Atom chip or another new Intel based chip then to create an operating system for a new and different architecture. 

Fourth, the fact that Intel is already going to have its chips appear in some 35 tablets indicates that Intel is poised to make inroads on ARM sooner rather than later. 

Fifth, the windows version for Windows phones already operates on ARM processors which utilizes screen touch capabilities but that is at least a year away from being converted to tablet compatibility, once again giving Apple's AAPL IPAD and tablets like Samsung's Galaxy crucial time to muscle in to ARM's territory not the reverse. 

Sixth, with the popularity of the Google's GOOG Android OS on smart phones it is little wonder that they have ported it to run on Intel chip sets. Additionally, Intel will debut its Atom chips hosted inside a variety of smart phones and tablets at the CES (Consumer Electronics Show), which is a large electronics industry show, on January 6^th, 2011. Although the chips will be appearing in tablets and netbooks first they will also be found in smart phones towards the second half of 2011.

Seventh, there was an announcement on Monday regarding Wind River collaborating with VIA Telecom Corp(Private Comapny) on and Android based solutions for smart phones to be sold in to China. For some reason the market has deemed this collaboration as a negative for Intel. As I see it Wind River can provide middleware, embedded systems and other software to VIA Telecom. Additionally, Wind River has developed the necessary tools for VIA Telecom to be able to bring low cost Android phones to market in China. So Intel will probably not be supplying the chips for those smart phones, but last I checked Wind River was a wholly owned subsidiary of Intel. As a subsidiary of Intel whatever Wind River does should be accretive for Intel which does not sound like a negative.  

It is true that Intel faces challenges breaking in to the smart phone market but I believe the tablet market has much lower barriers of entry for Intel. Moreover, the next generation of Atom processor (AKA Medfield) is addressing the prior problems of power consumption and is also reducing its footprint making it on par with ARM while providing higher performance. 

I should also point out that at this point Intel has moved well beyond just making processors for PCs as their business; they are into everything from wireless to flash memory and more. Basically if it uses any form of silicon there could be Intel inside. My point is that the market is acting as if the Microsoft/ARM cooperation is a death blow for Intel while in essence it is only a minor kerfuffle in the grand scheme of things.  The smart phone market is more mature but still growing while the tablet market is essentially in its infancy. I believe the tablet market will continue to grow and just like PCs there will be room for multiple players of which Intel will grab a good percentage. While the tablet market is exciting and sexy one has to remember that Intel is much bigger than just this one segment; Intel also is constantly looking for and expanding into new areas which are accretive to their bottom line.

It appears to me that Fortt either does not understand what he is reporting on or he has an an affinity for ARM, Microsoft or both. It looks increasingly like the IPAD is stealing from the low end laptop market which does affect Intel (more so for AMD), but most of Intel's profits and margins are made in the higher end chips and servers.  Conversely it looks to me like Microsoft is the one that has the problem here and is losing operating system share to Apple. This deal with ARM smells more like desperation on Microsoft's part than Intel's. Instead Intel appears to be marching down the path of breaking in to the areas that are currently Apple and ARM strongholds. 

Given the timing of the availability of the new Windows OS that would run on ARM and what real manufacturers in this dimension of reality are planning for tablets and smart phones,  I cannot fathom how one could jump to the conclusion that a potential entrant of a Windows OS that would run on ARM chips in the tablet space in 2 years is a threat to Intel in the present. Two years is an eternity in a tech cycle and in that same timeframe Intel should be able to be a very significant player in the tablet and smart phone arena. 

It is amazing to me that the ARM Microsoft agreement makes news and moves Intel Stock, but something like a collaboration of tech companies to solve the burgeoning problem of wireless traffic is barely even noticed. The more smart phones and tablets that all utilize wireless the bigger the traffic jam becomes. The fact that Intel, Cisco and Verizon are collaborating to remove the log jam makes no news even though these companies will all be beneficiaries and standard bearers once they implement the solutions. What good would an ARM based smart phone be if the wireless bandwidth is clogged.

The collaboration mentioned above is a result of the strong push toward “cloud” computing and even more streaming of media content both of which require greater bandwidth and remote computing power. The result of these new trends is that Intel's server and wireless infrastructure business will really pick up yet that never seems to be taken in to consideration when discussing the company. The street does not focus on the back end of the coming bandwidth and cloud trend because it is not “sexy” as there is no sizzle associated with replacing servers and other components to keep up with end user demand. It is no different than why politicians have neglected our infrastructure for so long. It is far more visible and by extension appealing to build the new community center which John Q can see than to replace the water main that is out of sight and mind. The difference here is that while it may be easier for Wall Street to sell the sizzle it is more prudent to buy the solid earnings with staying power. 

As I complete this piece Intel is trading at $20.88 with below average volume and is down for a second day bouncing around its 50 day moving average which has provided strong support. Could Intel go lower? To answer that all I can say is the market is a fickle beast and anything could happen.

At these levels Intel is pretty darn cheap and has not been this cheap since the late 1990's.  Additionally, the stock has been essentially in a long trading or basing pattern that some might call the sandpaper mode. The sandpaper mode is where the stock trades up and down within a range wearing both the longs and shorts out. Judging by the  sentiment toward Intel it seems to me that there is a good chance we are approaching the end of this phase as most investors have become disgusted with the stock since it like many other big cap tech stocks have not done much for the past few years.

Other factors point toward a bottoming process at current levels are a put to call volume ratio of .81 which is at a 52 week high on Intel and the volume  put to call ratio is 1.25. Additionally, as of the latest reading of the short interest ratio it stands at 1.9 or 90.12 million shares sold short. The latest reporting (12/1) of the short interest ratio was at the highest level since March 09 crash; given the put to call ratio I would guess that the short interest ratio climbed as well. In fact Intel showed up on the International Securities Exchange "Put Skews" list. This list is used to identify securities whose put volume is running at twice that of call volume. It appears that pessimism is running fairly high on Intel at the moment meaning that the downside is the crowded trade at present.  Please remember that negative sentiment is a signpost not a jersey barrier, but I have found in the past that issues tend to bottom in these types of scenarios. Once investors digest the information surrounding Intel they should reevaluate the scenario and the downward pressure should subside.

Given everything discussed here I just have to wonder what color is the sky in Fortt's world?

Disclosure: Long Intel (using a mental stop at $19.45)

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 I post this column on Thursdays here at Benzinga although I do have my own blog (monetaadvisors.com) where I cover stocks, commodities, precious metals, currencies, markets, government and interesting general observations that may not get play on Wall Street as well as subjects that interest me and hopefully you too. I am a Series 65 Investment Advisor Representative and have recently started my own investment advisory called Moneta Advisors, LLC, based in the Boston area. I have been through a series of careers from which I have learned many useful things along the way. In my past I have been a stockbroker, computer programmer, Sr. computer consultant, and ran a manufacturing company; all the while I remained a private investor.