Why Intel Lagged the Dow Today

The Dow Jones Industrial Average has had a pretty quiet day as investors begin dreaming about turkey and stuffing next week. The only mildly interesting data point out Friday was a rise in job openings to 3.91 million in September, up from 3.84 million in August. The report is one of a long string of economic reports that show a slow and steady improvement in the jobs market, which hasn't improved as fast as many have hoped.

The big move in the market today came from Intel , which may be making investors sick with its volatility this week. Yesterday, Intel was the best performer on the Dow Jones Industrial Average by gaining 2.7%. Today, it's by far the worst performer, falling 5.3%. But why?

Turn back the clock 24 hours
Yesterday's pop was driven by CEO Brian Krzanich's announcement that Intel would quadruple tablet chip volume and open up manufacturing plants for use by outside developers. This gave investors some hope that Intel would be able to take some share in tablets and mobile phones after being largely shut out of the market.  

PC sales have fallen dramatically over the past year. That has resulted in falling revenue for Intel, something the new strategy is supposed to remedy.

Intel system on a chip die. Image courtesy of Intel.

Pesky outlook hits again
Today's drop occurred because management said sales would likely be flat in 2014, which was disappointing considering the upbeat tablet production numbers. Wall Street's guess of 1.4% growth didn't help matters. When analysts get their guesses wrong there can be a harsh reaction in the stock, even though this is the first time Intel itself has told us what to expect in 2014.

The real story today is a disconnect between when Intel's mobile strategy will begin to impact sales and what investors expected. Intel's most impressive mobile chips, based on a 14 nm infrastructure, won't even be available until mid-to-late 2014, so why would investors expect a pickup in sales next year?

For the first half of the year, Intel will see a drag from falling PC sales and little pickup in tablet sales, simply because it hasn't been designed into many devices. Any mobile sales pickup will happen in the second half of the year and in 2015 when new chips hit the market.

Foolish takeaway
Wall Street often wants fast results from corporate turnarounds, but Intel's process to get into mobile has already taken years. Chips need to be designed, capital equipment needs to be built, and then chips need to be designed into devices. The process takes time; while we now understand Intel's strategy more clearly, it will still take time to build revenue growth.

Long term, I don't think the investment thesis behind Intel changed today. In fact, investors are getting a discount from a day ago. The company's strategy is in the right place, it'll just take a while to play out, so investors need to be patient.