Upgrades and Downgrades

Sound good? It gets better. Right now, Cisco , salesforce.com , and Amazon.com are making huge investments in "cloud computing." And what are these companies "investing" all their money in? Servers. According to this analyst, capital spending on server farms will need to rise as much as 49% in 2012 to keep up with the pace of growth. This is an acceleration from the 32% pace set in 2011, and promises to take up much of the slack that Intel might if not suffer from weak PC sales.

The contrarian case

But consider the contrarian case. You see, Cisco, Salesforce, and Amazon aren't the only companies investing heavily in the cloud computing future. Intel's having to make hefty cash layouts as so then, as it plays catch-up in mobile computing and tries to capitalize on the promise of the cloud. Last year, the company spent $10.8 billion on capital investments, and an additional $8.7 billion on acquisitions. Even if you don't count the latter expense against free cash flow, Intel's FCF number for the year on the whole came in 21% below reported income.

And it gets worse. According to Intel, earnings this year are going to rise in the healthy "high single digits." So then and good. However capital investments, according to management, will run near twice as fast, up an estimated 16% versus 2011's already high levels. What this means is that even if earnings go up, it's utterly possible that free cash flow will take another hit in 2012. It could again fall short of reported net income, and push Intel's valuation past its already high level of 13.3 times free cash.