Excerpt from Andrew Neff, Bear Stern's analyst. Article appeared in BARRON January 28, 1997
Tech Stocks May Soar on Wings of MMX,
Pentium Pro
Howard R. Gold , interviewed Andrew Neff
An interview with Andrew J. Neff. For some time,
big technology stocks have led this bull market higher
and higher. As 1997 dawns, investors are watching
several key developments, especially the multimedia
MMX Pentium chip, to gauge the health of this vital
industry. Barron's Online turned to Andrew J. Neff,
senior managing director and head of technology
research at Bear Stearns & Co., Inc., for his views on
how the sector will perform this year. A University of
Rochester graduate with a Harvard MBA, Andy has
been following technology for Bear Stearns since
1987.
". . . . We have tried to enumerate ten factors driving demand.
They include the Windows NT upgrade cycle, MMX technology, replacement demand, the Internet, mobile computers, workstations, 56-KB modem technology.
Also, growth outside the U.S. is greater than it is here, particularly in the Asia/Pacific region.
Neff:
". . . One of the things to keep in mind about the computer industry is that anywhere between 20% and 35% of the installed base upgrades every year. That is very different from other industries, and sort of flies in the face of arguments that we're near saturation. In fact, I think it is just the opposite: The larger the total base,
the larger the increase in demand.
NEFF
" . . The overriding point is, this is going to be a very good year. Advances in technology are going to be very significant, both for corporate and consumer users.
We're seeing increases in growth outside the U.S., as well as domestically.
Q: Let's move right into some of these advances, which brings us to Intel's MMX chip, released early in January. Would you tell us about it?
A: MMX stands for Multimedia Extensions. Essentially what Intel did was add a certain number of instructions to the microprocessor, instructions that are geared especifically to accelerating multimedia functions, such as sound, graphics, video, imaging.
Q: The bottom line is that it significantly speeds up graphics, communications and video applications.
A: Yes. On a non-MMX-tuned application it would only be 20% faster, which certainly doesn't hurt. But running applications that incorporate the additional instructions can be up to two times faster on video, up to three times faster on sound,
and four times faster on graphics. For certain applications, such as video conferencing or video games, that can be very significant.
Q: What effect do you think MMX will have on PC sales?
A: MMX is going to lead to a new wave of buying initially by consumers who have been holding off waiting for the latest and greatest Intel technology.
Q: Is MMX primarily a consumer-oriented product?
A: Well initially, but later on you will see business applications. It is a consumer product because consumers are usually the ones that first adopt multimedia. But the applications like voice and sound will eventually end up in business applications as well. In fact, we will see MMX in Pentium Pro machines, probably later this year.
Q: Because of the MMX launch, you said some of the normal computer buying patterns could change this year.
A: This Christmas, there was a lot of anticipation about MMX technology, so some
people held off, waiting for it. On the other hand, January is usually a very strong month for retail PC sales. Then the consumer segment tends to die off come mid-February, and usually the worst time of year is right around April 15: people who are paying taxes don't really feel like spending money for computers.
This year I think it might be different in that as you start seeing the media and marketing build-up about MMX, January could be slower than anticipated, and you may see some more buying in the spring, which is typically slow.
I think the larger issue is that in 1997, Intel is going to have one of its biggest years ever in improvement of processor performance. That will have an impact on consumer buying, and the advancement in the Pentium Pro should boost the business market as well.
Q: People also have been waiting for the Pentium Pro, Intel's next generation of microprocessor. Why is that important?
A: It is significant because it is going to be faster, and once people see something is faster they are willing to pay a premium over the price of the previous generation.
Q: So, do you think corporate buyers have been holding out waiting for the conjunction of Microsoft's Windows NT 4.0 operating system and the Pentium Pro?
A: Somewhere around April 1996, you began to see the purchase by the corporatebuyer of Windows 95 on the Pentium. And in 1997 we should see a move to Windows NT on the Pentium Pro. That is one of the things driving the market.
Concurrent with that, the server market is moving to Pentium Pro even quicker.
Q: Obviously the prime beneficiary of all this is Intel.
A: Intel is really a core holding in this sector. Intel is going to be a beneficiary of a lot of key trends, including advances in processor performance and an emerging trend toward more than one Intel processor in a box. The key to multiprocessing on
the desktop is you have to have a multiprocessing operating system, which is what Windows NT is. In fact, the microprocessor-to-machine ratio is around 1.05 today.
It could be somewhere around 1.3 within three years.
Q: That's 1.3 microprocessors for every machine, meaning there are more machines out there with dual microprocessors.
A: Right. That won't necessarily become a low-end consumer product, but for the corporate desktop and the power user, it can become much more prevalent.
Q: You are calling for Intel to earn $8.50 a share this year?
A: We recently raised that to $8.75. We are looking for $10.75 in 1998.
|
