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Technology Stocks : Intel Corporation (INTC)
INTC 37.81-4.3%Dec 12 9:30 AM EST
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To: Baldur Fjvlnisson who wrote (162235)3/15/2002 11:12:42 AM
From: Robert Douglas  Read Replies (1) of 186894
 
Intel now sells for 8.3 times its own sales, a monumental valuation for a mature company.

A price/sales ratio of 8 sounds rich. But what does it mean?

Many years ago, it was a fairly common metric to say that one times sales was a reasonable price for the average company to sell at. This implies an average profit margin of 5% and an average P/E of 20.

P/S = (P/E) X (E/S) or 1 = (20) X (.05)

<duh>

For a company to sell above one times sales requires at least one of the following.

(a) Its growth prospects are above average.
(b) Its profit margin is above average.

Intel is clearly a mature company. Its growth prospects, due to its size, are shrinking. Still, I would say that Intel’s growth rate will be above average as the world’s markets open up to technology.

The key will be Intel’s profit margins going forward. During most of the nineties, these margins were four to six times that average of 5%. This explains the high price/sales ratio. If you are arguing that these margins will collapse, then Intel is way overpriced indeed. If you feel that margins will return to the 31% level seen in 2000, then I say Intel is underpriced. The future probably lies somewhere between.

This is where the debate should focus. Intel’s margins have been so high due to their competitive position and the nature of the capital intensive semiconductor industry. Let the debate focus on the facts not some spurious comparison with GM or industries on the decline.
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