Do I think they deserve a 20-25 PE?
Well, given what other companies have, yes.
If you assume a cost of capital of 12-15 percent for Intel and a long term growth rate of 7-12 percent, you can justify those levels of PE ratios (using the Gordon Growth Model).
I believe those costs of capital are reasonable. The only question is Intel's ability to continue to grow.
While I personally believe that a tech company, because of the high obsolescence factor, has difficulty maintaining consistantly high rates of growth, Intel has been an exception in the past. Their current plans, what we know of them, indicate that they will continue to have leading edge products.
Can they continue to grow the top line at 20 percent or more? Is that sustainable? I don't know. But they are certainly not the largest company in the world yet.
Intel has tremendous competancies in both MPU creation and chip manufacture (great yields at leading edge line widths and wafer sizes).
The only weaknesses I see for them long term are the increasing costs of fabs and the potential for a shift, not dissimilar from the Mainframe - Mini - Micro shifts of the past to some type of PDA that doesn't require existing software, is cheap, and runs on a battery. Intel could probably recover from such a market shift given Mr. Grove's management by paranoia style. I just worry that, for some reason, they might be vulnerable there.
Otherwise, the idea that Intel should trading at a sub-market average multiple is some kind of imbalance that, in time, will adjust.
Not a discussion for someone looking to trade on the basis of a week or month (I've been there), but certainly one for a long term player.
Just my thoughts.
Larry
PS I hope it goes down a few points so I can buy some more. |
