StreetAdvisor.com ......""In light of the Barron's article harshly criticizing Intel
over the weekend, I decided to tell the real story on
Intel, which the publication so elegantly failed to
mention.
The rudimentary calculation of Intel's fair value
based on a multiple of Intel's earnings growth
(17%), which sets a fair value, by the author, of
$39 to $59 wholly ignores the fact that multiples
of earnings growth require factoring in current
interest rates. This is why the S&P 500 currently
trades at 24.7 times this year's consensus
earnings, at a multiple of 1.85 times the 2000
growth rate of 13.5%. Since the compounding of
growth rates over time creates a significant
difference between 13.5% and 17% earnings
growth, a multiple of 2 times earnings for Intel not
only seems reasonable, but cheap.
The statement that "powerhouses in the server
business, like IBM and Sun Microsystems, are not
likely to willingly cede market share to Intel" is
wholly absurd. IBM's server market share was half
of that of Dell, the #2 server producer. Dell is
wholly committed to Intel, and only Intel,
processors. Further, the simple fact is that PC
makers do not have the power to control
purchasing decisions of customers. The corporate
world would love to standardize on one company's
processors. Intel's next generation of processors
will enable them to do so, as the Itanium supports
every major operating system.
The Itanium processor is perhaps the most robust
processor ever built. With Intel's billions of dollars
of research and development funds pouring into its
development, it will be virtually impossible for the
Alpha processor to maintain any current lead for
much longer.
Demand for servers is overwhelming. Craig Barret,
CEO of Intel, predicts that only 5% of the server
demand for the next 5 years has been met. That
provides a massive market opportunity for the
research and development gorilla.
Intel continues to drive manufacturing costs of its
chips lower, continually increasing the margins it
realizes despite lower prices. Instead of the
self-fulfilling death spiral that Barron's sees, Intel
is in a wealth-creating tornado. Plummeting costs
allow Intel to push prices lower, keeping demand
for PCs growing, boosting the top and bottom line
simultaneously.
Intel's investments are no secret, but nonetheless
are almost completely ignored by Barron's.
Streaming media created the need for much of
today's computing power for consumers, and a
healthy chunk of server power, yet the history of
Intel's investment in Broadcast.com is not even
mentioned (the company sold their stake earlier
this year). That said, Intel's current investments
will likely drive consumer and server demand well
into the future.
The migration to the Microsoft 2000 operating
system for serving web sites, as well as for
corporate servers will only increase demand for
Intel processors, which are the proven processor
for Microsoft operating systems.
Intel's transference of their design and
manufacturing expertise to chips for networking
devices provides significant upside to the Intel
story. With a billion people on the net, and millions
of those on broadband connections, all those Intel
servers need fast routers and switches to get
their data to the destination. $8 billion goes a lot
further than the mere millions that start-ups have.
Intel is also using its engineering expertise to set
the standard for how networking devices work
together. The company's Internet Exchange
Architecture could become the standard of
networking that Intel's processor blueprints are for
computing.
Intel's ability to manufacture semiconductors for
fractions of what competitors can gives it
significant competitive advantage in the extremely
price sensitive area of appliance processors (palm
tops, set tops boxes, phones, etc.).
Given these prospects, and the rest of the complete
picture we reviewed in August (link to full analysis),
Intel is not just fairly valued, but significantly
undervalued."" |
