Jules,
I found this interview with Andrew Neff at the
barrons site. It is long, but my modest experience
has led me to some respect for Neff. I was going
to post this at the other thread as well, but I don't
honestly know what in the world they are talking
about anymore. I thought these threads were about
stocks. Anyway, I thought it was decently good
info. I think it was done in late January, so
he was obviously wrong in the short term, but it
is thinking like that described here that is the
reason, I bought and continue to buy INTC as a
core holding for long term growth.
Anyway, here it is. Comments from any and all
are appreciated.
===============================================
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.
Barron's Online: Since the sell-off last spring, there has been a nice recovery in
the technology sector. In fact it has really been one of the market leaders. In
some of your reports you cite some reasons why PC growth will continue to be
strong in 1997 and beyond. Would you elaborate?
Neff: It is important that there be more than one factor driving demand. If you
depend on one factor, that raises the risk to investors, because if that one thing
doesn't happen, the growth might not be there. 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.
Q: So you're saying there are many factors coming together this year. We will
get into Intel's MMX technology and Pentium Pro chip later. But I did want to
ask you about the demand for greater bandwidth and more and more storage
capacity on computers.
A: What is interesting about the Internet is that whenever you get to where you think
you want to be, you're not there yet. A couple of years ago, you had 9600-baud
modems. Now 14,400-baud is already obsolete, and 28,800-baud is almost
obsolete.
As for storage capacity, in the consumer market, a one-gigabyte hard drive is entry
level, 2 GB is becoming standard, 3.8 GB is high end. Next year we may have a
standard 6-GB hard drive, 3 GB will be entry level. Declining price per MB is
leading to more demand for bigger and bigger disk drives.
Q: Based on all these factors, you forecast global shipments of PCs this year
will increase by around 20%. Is that a combination of consumer and corporate,
domestic and international?
|A: Right. 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.
Q: So, do you think this is going to be a good year for technology and
technology stocks?
A: I think this is going to be a good year, but investors have to be wary of some key
issues that are coming up. For example, Intel is cutting prices coming Feb. 1.
Everybody knows about it, and corporate buyers have begun to slow down their
purchases. When the new prices come out, the trade press will say, oh, there is a
price war going on. It is not a price war; it is a price cut. So, customers will settle in
and then the buying will start up again.
Q: You are saying investors have to ignore these zigs and zags.
A: Right. 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
specifically 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 corporate
buyer 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.
Q: It is trading at about 14 times estimated 1998 earnings. You think it is still
attractive at this stage to buy?
A: Yes.
Regards,
J |
