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First, thanks for the compliment on your #1914 re: my point that INTC was undervalued, ie., "What would Coca Cola's P/E be if there were no Pepsi" Let me elaborate a little because there are some important differences between the two industries.
What I was pointing out was the value of the INTC franchise in the marketplace. I do believe it is undervalued in the long term. At the same time, there are some big differences between KO and INTC. For one thing, KO and investors don't have to worry about technical obsolescence the way INTC does. That increases uncertainty. Next, and this factor is quantifiable, INTC has a much bigger investment in capital spending than KO, and that in the short run cuts down the cash flow. For Graham/Dodd/Buffett type of investors (like me), this puts a downward pressure on short-term P/E's. (Buffett talks about "owner earnings"
as earnings, plus depreciation, minus capital spending.)
Given INTC's recent high capital spending, it has better long-term potential in this sense than short-term. At the same time that capital spending insulates INTC from competition. I believe a better
metaphor for INTC is that they are truly, "The Standard Oil of the Information Age." While no analogy is perfect, Standard Oil obtained dominance by capital investment (and some now illegal nasty tactics).
Regarding your point to John Fowler, (What's Next), see the Fortune inteview with Andy Grove and Bill Gates (7/8/96), p. 52. Andy Grove is betting that more powerful CPUs will enable videoconferencing over regular phone lines. Now that's not a new idea, but it fits with putting more on a chip that eliminates obstacles in the computing environment. For example, motherboards were an obstacle to growth, so INTC got into the motherboard business. Limited bandwidth is an obstacle to growth, so more powerful CPUs can break that obstacle. It's that kind of market-driven thinking that makes INTC such a powerful and unique franchise.
Harry |
